<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997
REGISTRATION NO. 333-37045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CITY NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6712 95-2568550
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
400 NORTH ROXBURY DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 888-6000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------
RICHARD H. SHEEHAN, JR., ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
CITY NATIONAL CORPORATION
400 NORTH ROXBURY DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 888-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------
COPIES TO:
WILLIAM L. CATHEY, JR., ESQ. THOMAS D. PHELPS, ESQ.
Munger, Tolles & Olson LLP Manatt, Phelps & Phillips, LLP
355 South Grand Avenue 11355 West Olympic Boulevard
Los Angeles, California 90071-1560 Los Angeles, California 90064-1614
(213) 683-9100 (310) 312-4141
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HARBOR BANCORP
11 GOLDEN SHORE
LONG BEACH, CALIFORNIA 90802
------------------------
OCTOBER 16, 1997
------------------------
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Harbor Bancorp ("Harbor") on Tuesday, November 18, 1997,
at 2:00 p.m., which will be held in the Catalina Room, Long Beach Hilton, 2
World Trade Center, Long Beach, California.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which Harbor would be merged into City National Corporation ("City
National"), and, subject to the terms and conditions of the Merger Agreement,
shareholders of Harbor would receive cash, City National common stock, or a
combination of the two, at their election (subject to a fixed maximum and
minimum amount of City National shares to be issued in the aggregate), in
exchange for their shares of Harbor common stock. Thereafter, Harbor's
subsidiary Harbor Bank shall be merged into City National's subsidiary City
National Bank. The enclosed Proxy Statement/Prospectus more fully describes the
proposed merger and related transactions, including information about Harbor and
City National.
The Board of Directors of Harbor has carefully considered the terms and
conditions of the Merger Agreement and the proposed merger with City National.
THE BOARD OF DIRECTORS BELIEVES THE PROPOSED MERGER IS IN THE BEST INTERESTS OF
HARBOR AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ITS
APPROVAL.
We urge you to read carefully the enclosed Notice of Special Meeting and
Proxy Statement/Prospectus which more fully describe the terms of the Merger
Agreement and the proposed merger.
It is important that your shares be represented at the Special Meeting,
whether or not you plan to attend in person. Therefore, you should complete,
sign and date the enclosed proxy card and return it as soon as possible in the
enclosed postage-paid envelope so that your shares will be represented at the
Special Meeting. If you attend the Special Meeting, you may vote in person if
you wish, even if you have previously returned a proxy card.
We look forward to seeing you at this important Special Meeting.
James H. Gray
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
HARBOR BANCORP
11 GOLDEN SHORE
LONG BEACH, CALIFORNIA 90802
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 18, 1997
------------------------
TO THE SHAREHOLDERS OF HARBOR BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the call of its
Board of Directors, a Special Meeting of Shareholders (the "Special Meeting") of
Harbor Bancorp ("Harbor") will be held on Tuesday, November 18, 1997 at 2:00
p.m. Pacific Standard Time in the Catalina Room, Long Beach Hilton, 2 World
Trade Center, Long Beach, California, for the following purposes, as set forth
in the attached Proxy Statement/Prospectus:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger dated as of August 28, 1997 (the "Merger Agreement") between
City National Corporation ("City National") and Harbor, pursuant to which
Harbor would be merged into City National (the "Merger"). A copy of the
Merger Agreement is included in the Proxy Statement/Prospectus as Appendix
A. Under the terms of the Merger Agreement, and subject to certain
allocation procedures designed to ensure that at least 48%, and no more than
55%, of the total consideration paid to holders of the common stock, no par
value, of Harbor (the "Harbor Stock") is paid in the form of common stock,
$1.00 par value, of City National ("City National Stock"), each outstanding
share of Harbor Stock would be converted in the Merger into, at the election
of the holder, cash, City National Stock, or a combination of the two.
Holders receiving cash will receive $24.10 for each share of Harbor Stock
held by them. Holders receiving City National Stock will receive for each
share of Harbor Stock held by them, that fraction of a share of City
National Stock (the "Exchange Ratio") determined by dividing $24.10 by the
average closing price per share of City National Stock for the 20
consecutive trading days ending on the third trading day immediately prior
to the consummation of the Merger (the "Final City National Stock Price");
provided, in the event (a) the Final City National Stock Price is more than
$31.9125 but less than or equal to $34.6875, the Exchange Ratio will be
0.7552, (b) the Final City National Stock Price is less than $23.5875, the
Exchange Ratio shall be 1.0217, or (c) the Final City National Stock Price
is greater than $34.6875, the Exchange Ratio shall be 26.20 divided by the
Final City National Stock Price.
2. To transact any other business which may properly come before the
Special Meeting or any adjournments or postponements thereof.
Only those shareholders of record at the close of business on October 15,
1997 are entitled to notice of and to vote at the Special Meeting or any
adjournments or postponements thereof. The affirmative vote of a majority of the
outstanding shares of Harbor is required to approve the principal terms of the
Merger Agreement and the Merger.
If the Merger is consummated, holders of Harbor Stock who comply with the
requirements of Chapter 13 ("Chapter 13") of the California General Corporation
Law may have the right to receive from City National a cash payment of the fair
market value of their Harbor Stock determined in accordance with Chapter 13. See
"DISSENTERS' RIGHTS" in the attached Proxy Statement/Prospectus for a discussion
of the availability of dissenters' rights and a description of the procedures
which must be followed to enforce such rights under Chapter 13, pertinent
provisions of which are included as Appendix B to the Proxy Statement/Prospectus
and incorporated herein by this reference.
<PAGE>
More detailed information about the proposed Merger and other matters
regarding the Special Meeting is included in the attached Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF HARBOR HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, THE MERGER, AND THE RELATED MATTERS AND THE TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE TO
APPROVE THE MERGER AGREEMENT AND THE MERGER AT THE SPECIAL MEETING.
By order of the Board of Directors
Dorothy K. Matteson
SECRETARY
Long Beach, California
October 16, 1997
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO SIGN AND RETURN
THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING IN PERSON. IF YOU DO ATTEND THE SPECIAL MEETING, YOU
MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON AT THAT TIME. YOU MAY REVOKE YOUR
PROXY AT ANY TIME PRIOR TO ITS EXERCISE.
PLEASE INDICATE ON THE PROXY CARD WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING SO WE CAN PROVIDE ADEQUATE ACCOMMODATIONS.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROXY STATEMENT
HARBOR BANCORP
SPECIAL MEETING TO BE HELD ON
NOVEMBER 18, 1997
---------------------
PROSPECTUS
CITY NATIONAL CORPORATION
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
---------------------
This Proxy Statement/Prospectus is being furnished to the holders of common
stock, no par value ("Harbor Stock"), of Harbor Bancorp, a California
corporation ("Harbor"), in connection with the solicitation of proxies by the
Board of Directors of Harbor for use at the special meeting of Harbor's
shareholders to be held on Tuesday, November 18, 1997, at 2:00 p.m., Pacific
Standard Time, in the Catalina Room, Long Beach Hilton, 2 World Trade Center,
Long Beach, California, and at any adjournments or postponements thereof (the
"Special Meeting").
At the Special Meeting, the shareholders of record of Harbor Stock as of the
close of business on October 15, 1997 will consider and vote upon a proposal to
approve the Agreement and Plan of Merger, dated as of August 28, 1997 (the
"Merger Agreement"), by and between City National Corporation, a Delaware
corporation ("City National"), and Harbor pursuant to which Harbor will merge
with and into City National (the "Merger"). See "THE SPECIAL MEETING." Upon
consummation of the Merger, each outstanding share of Harbor Stock (except for
shares held by Harbor shareholders properly exercising dissenters' rights and
shares held by City National or Harbor) will be converted into the right to
receive either (1) $24.10 in cash; (2) shares of common stock of City National,
par value $1.00 per share ("City National Stock") calculated as described in
this Proxy Statement/Prospectus; or (3) a combination of cash and City National
Stock calculated as described in this Proxy Statement/Prospectus, and holders of
Harbor Stock will be given the opportunity to indicate the form of consideration
they prefer. See "THE MERGER--Consideration Payable Upon Consummation of the
Merger." Pursuant to the Merger Agreement, at least 48%, but no more than 55%,
of the total consideration paid to holders of Harbor Stock will be paid in the
form of shares of City National Stock. In the event that holders of Harbor Stock
elect, in the aggregate, to convert shares representing less than 48% of the
total consideration into shares of City National Stock, certain holders of
Harbor Stock who elected to receive cash will instead receive a prorated number
of shares of City National Stock and a prorated amount of cash such that at
least 48% of the total consideration is paid in the form of City National Stock.
Likewise, if holders of Harbor Stock elect, in the aggregate, to convert shares
representing more than 55% of the total consideration into shares of City
National Stock, certain holders of Harbor Stock who elected to receive City
National Stock will instead receive a prorated number of shares of City National
Stock and a prorated amount of cash such that no more than 55% of the total
consideration is paid in the form of City National Stock. The fraction of a
share of City National Stock into which each share of Harbor Stock for which an
effective Stock Election or Combination Election (each as hereinafter defined)
is made will be converted in the Merger cannot be determined until the Election
Deadline. See "THE MERGER." The Merger Agreement is included as Appendix A to
this Proxy Statement/Prospectus. If all conditions to the Merger, including
receipt of all regulatory approvals and the shareholder approval being sought at
the Special Meeting, are satisfied or
<PAGE>
waived prior to January 9, 1998, the Merger currently is expected to be
consummated on January 9, 1998 and not, in any event, during 1997.
This Proxy Statement/Prospectus also constitutes a prospectus of City
National in respect of up to 805,000 shares of City National Stock to be issued
upon consummation of the Merger pursuant to the Merger Agreement.
The outstanding shares of City National Stock are listed on the New York
Stock Exchange ("NYSE"). The last reported sale price of City National Stock on
the NYSE Composite Transactions Tape on October 10, 1997 was $31.1875 per share.
This Proxy Statement/Prospectus, the attached Notice to Shareholders and the
accompanying proxy cards are first being mailed to shareholders of Harbor on or
about October 16, 1997.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE SHARES OF CITY NATIONAL STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
The date of this Proxy Statement/Prospectus is October 16, 1997.
2
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Proxy Statement/Prospectus and the
documents incorporated herein by reference may constitute forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of City
National and/or Harbor to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Specifically, City National and Harbor caution readers that the
following important factors could affect City National's and/or Harbor's
respective businesses and cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, City
National or Harbor in this Proxy Statement/Prospectus:
1. ECONOMIC CONDITIONS. City National's and Harbor's respective
results are strongly influenced by general economic conditions in their
respective market areas. Accordingly, a deterioration in these conditions
could have a material adverse impact on the quality of City National's or
Harbor's loan portfolio and the demand for their products and services. In
particular, changes in economic conditions in the real estate and, with
respect to City National only, entertainment industries may affect their
performance.
2. INTEREST RATES. City National anticipates that interest rate levels
will remain generally constant into 1998, but if interest rates vary
substantially from present levels, City National's and/or Harbor's results
may differ materially from the results currently anticipated.
3. GOVERNMENT REGULATION AND MONETARY POLICY. All forward-looking
statements presume a continuation of the existing regulatory environment and
United States' government monetary policies. The banking industry is subject
to extensive federal and state regulations, and significant new laws or
changes in, or repeals of, existing laws may cause results to differ
materially. Further, federal monetary policy, particularly as implemented
through the Federal Reserve System, significantly affects credit conditions
for City National and Harbor, primarily through open market operations in
United States government securities, the discount rate for member bank
borrowings and bank reserve requirements, and a material change in these
conditions would be likely to have a material impact on City National's
and/or Harbor's results.
4. COMPETITION. City National and Harbor compete with numerous other
domestic and foreign financial institutions and non-depository financial
intermediaries. Results of City National and/or Harbor may differ if
circumstances affecting the nature or level of competition change, such as
the merger of competing financial institutions or the acquisition of
California institutions by out-of-state companies.
5. CREDIT QUALITY. A significant source of risk arises from the
possibility that losses will be sustained because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their
loans. City National and Harbor have adopted underwriting and credit
monitoring procedures and credit policies, including the establishment and
review of the allowance for credit losses, that their respective managements
believe are appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying City National's
and Harbor's respective credit portfolios, but such policies and procedures
may not prevent unexpected losses that could materially adversely affect
City National's and/or Harbor's results.
6. OTHER RISKS. From time to time, City National and Harbor detail
other risks with respect to their respective businesses and/or their
financial results in their respective filings with the Securities and
Exchange Commission (the "SEC"). Harbor shareholders are urged to review the
risks described in such filings. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
3
<PAGE>
While management of City National and Harbor believe that their respective
assumptions regarding these and other factors on which forward-looking
statements are based are reasonable, such assumptions are necessarily
speculative in nature, and actual outcomes can be expected to differ to some
degree. Consequently, there can be no assurance that the results described in
such forward-looking statements will, in fact, be achieved.
AVAILABLE INFORMATION
City National and Harbor are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, each files reports, proxy statements and other information
with the SEC. Such reports, proxy statements, and other information can be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC maintains a website at
http://www.sec.gov that also contains such reports, proxy statements and other
information concerning City National and Harbor, each of which files information
electronically with the SEC. The City National Stock is listed on the NYSE, and
such reports, proxy statements and other information concerning City National
should be available for inspection and copying at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
This Proxy Statement/Prospectus constitutes a part of a registration
statement on Form S-4 (together with all amendments and exhibits, the
"Registration Statement") filed by City National with the SEC under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
shares of City National Stock to be issued in the Merger. This Proxy
Statement/Prospectus does not contain all of the information included in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. Statements contained herein concerning the
provisions of any document do not purport to be complete and, in each instance,
are qualified in all respects by reference to the copy of such document filed as
an exhibit to the Registration Statement or otherwise filed with the SEC. Each
such statement is subject to and qualified in its entirety by such reference.
Reference is made to such Registration Statement and to the exhibits relating
thereto for further information with respect to City National and the securities
offered hereby. Copies of all or any part of the Registration Statement,
including exhibits thereto, may be obtained, upon payment of the prescribed
fees, or inspected at the offices of the SEC and the NYSE as set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
PROVISION OF CERTAIN OF HARBOR'S REPORTS
The following documents filed with the SEC by City National are hereby
incorporated by reference in this Proxy Statement/Prospectus and made a part
hereof: (1) Current Report on Form 8-K, filed March 12, 1997; (2) Annual Report
on Form 10-K for the fiscal year ended December 31, 1996; and (3) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997.
The following documents filed with the SEC by Harbor are hereby incorporated
by reference in this Proxy Statement/Prospectus and made a part hereof: (1)
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996; (2)
Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1997 and June
30, 1997; and (3) Registration Statement on Form 10SB filed on June 20, 1997.
This Proxy Statement/Prospectus is accompanied by copies of Harbor's Annual
Report on Form 10-KSB for the year ended December 31, 1996 which is attached
hereto as Appendix E and Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 which is attached hereto as Appendix F.
All documents filed by City National or Harbor pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the Special Meeting shall be
4
<PAGE>
deemed incorporated by reference in this Proxy Statement/Prospectus and a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed incorporated herein by reference will be deemed
to be modified or superseded for purpose of this Proxy Statement/ Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is, or is deemed to be, incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS
RELATING TO CITY NATIONAL, OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS, ARE
AVAILABLE, WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST, FROM JAMES A. DUNNIGAN,
CITY NATIONAL CORPORATION, 400 NORTH ROXBURY DRIVE, BEVERLY HILLS, CALIFORNIA
90210, TELEPHONE (310) 888-6636. COPIES OF SUCH DOCUMENTS RELATING TO HARBOR,
OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE, WITHOUT CHARGE
UPON WRITTEN OR ORAL REQUEST, FROM MELISSA LANFRE, HARBOR BANCORP, 11 GOLDEN
SHORE, LONG BEACH, CALIFORNIA 90802, TELEPHONE (562) 491-1111. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER
11, 1997.
------------------------
FOR NORTH CAROLINA RESIDENTS:
THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT
APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
------------------------
All information contained in this Proxy Statement/Prospectus with respect to
City National and City National Bank and its subsidiaries has been supplied by
City National, and all information with respect to Harbor and Harbor Bank has
been supplied by Harbor.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CITY NATIONAL OR
HARBOR SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITY OTHER THAN THE CITY NATIONAL STOCK TO WHICH
IT RELATES.
5
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................... 3
AVAILABLE INFORMATION..................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
PROVISION OF CERTAIN OF HARBOR'S REPORTS................................ 4
TABLE OF CONTENTS......................................................... 6
INDEX OF CERTAIN DEFINED TERMS............................................ 9
SUMMARY................................................................... 11
Parties to the Merger................................................... 11
Special Meeting of Shareholders......................................... 11
Vote Required; Record Date.............................................. 11
Effect of the Merger.................................................... 11
Consideration Payable Upon Consummation of the Merger................... 12
Reasons for the Merger; Recommendation of Board of Directors............ 12
Opinion of Financial Advisor............................................ 13
Effective Time.......................................................... 13
Conditions; Regulatory Approvals........................................ 13
Conduct of Business Pending Merger...................................... 14
Termination of the Merger Agreement..................................... 14
Bank Merger............................................................. 14
Interests of Certain Persons in the Merger.............................. 14
Certain Federal Income Tax Considerations............................... 15
Accounting Treatment.................................................... 15
Shareholders' Agreement................................................. 15
Stock Option Agreement.................................................. 16
Dissenters' Rights...................................................... 16
Certain Differences in Shareholders' Rights............................. 16
Markets and Market Prices............................................... 16
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 17
City National........................................................... 17
Harbor.................................................................. 19
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION......................... 21
COMPARATIVE PER SHARE DATA (UNAUDITED).................................... 22
INTRODUCTION.............................................................. 23
General................................................................. 23
Parties to the Merger................................................... 23
Markets and Market Prices............................................... 24
THE SPECIAL MEETING....................................................... 25
Record Date............................................................. 25
Proxies................................................................. 25
Quorum.................................................................. 25
Vote Required........................................................... 25
Shareholdings of Certain Beneficial Owners and Harbor's Management...... 26
THE MERGER................................................................ 28
Background of and Reasons for the Merger................................ 28
Recommendation of the Harbor Board of Directors......................... 29
Opinion of Financial Advisor to Harbor.................................. 29
Effect of the Merger.................................................... 34
Consideration Payable Upon Consummation of the Merger................... 34
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Effective Time.......................................................... 36
Surrender of Harbor Stock Certificates.................................. 36
Conditions to Consummation of the Merger................................ 37
Regulatory Approvals.................................................... 39
Conduct of Business Pending the Merger.................................. 40
No Solicitation......................................................... 41
Amendment and Termination............................................... 41
Bank Merger............................................................. 42
Interests of Certain Persons in the Merger.............................. 42
Effect on Harbor Employee Benefit Plans................................. 43
Stock Options........................................................... 45
Certain Federal Income Tax Considerations............................... 45
Accounting Treatment.................................................... 49
Expenses................................................................ 49
CERTAIN RELATED AGREEMENTS................................................ 50
Shareholders' Agreement................................................. 50
Stock Option Agreement.................................................. 50
Resale of City National Stock........................................... 52
DESCRIPTION OF CAPITAL STOCK.............................................. 53
Common Stock............................................................ 53
Preferred Stock......................................................... 53
Rights Agreement........................................................ 53
Section 203 of the Delaware General Corporation Law..................... 54
Charter and Bylaw Provisions............................................ 55
Limitation on Director's Liability...................................... 56
DISSENTERS' RIGHTS........................................................ 57
Rights of Dissenting Shareholders....................................... 57
Federal Income Tax Treatment of Dissenters.............................. 58
COMPARISON OF RIGHTS OF HOLDERS OF CITY NATIONAL STOCK AND
HARBOR STOCK............................................................ 58
Certain Voting Rights................................................... 58
Dividends............................................................... 60
Election of Directors; Board of Directors............................... 60
Removal of Directors; Filling Vacancies on the Board of Directors....... 60
Special Meetings of Shareholders; Shareholder Action by Written
Consent............................................................... 61
Amendment of Bylaws..................................................... 61
Amendment of Charter.................................................... 62
Dissenters' Rights...................................................... 62
Certain Business Combinations and Reorganizations....................... 62
VALIDITY OF CITY NATIONAL STOCK........................................... 63
EXPERTS................................................................... 63
OTHER MATTERS............................................................. 63
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION........................ 64
</TABLE>
<TABLE>
<S> <C>
APPENDIX A MERGER AGREEMENT
APPENDIX B CALIFORNIA GENERAL CORPORATION LAW
APPENDIX C STOCK OPTION AGREEMENT
APPENDIX D FAIRNESS OPINION OF HOEFER & ARNETT, INC.
APPENDIX E HARBOR BANCORP'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1996
APPENDIX F HARBOR BANCORP'S QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTER ENDED JUNE 30, 1997
</TABLE>
8
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
10% Ownership Date........................................................ 51
10% Stockholder........................................................... 51
Allocated Exchange Ratio.................................................. 29
Allocated Per Share Cash Consideration.................................... 30
Applicable Price.......................................................... 49
Bank Merger............................................................... 14
BHCA...................................................................... 37
Business Combination...................................................... 51
California Code........................................................... 15
Cancelled Shares.......................................................... 12
Cash Election............................................................. 33
Chapter 13................................................................ 53
City National............................................................. 1
City National By-laws..................................................... 55
City National Certificate................................................. 55
City National Stock....................................................... 1
Code...................................................................... 13
Combination Election...................................................... 33
Delaware Code............................................................. 34
Distribution Date......................................................... 51
Election.................................................................. 33
Election Deadline......................................................... 33
ESOP...................................................................... 42
Exchange Act.............................................................. 4
Exchange Agent............................................................ 33
12,
Exchange Ratio............................................................ 33
Exercise Event............................................................ 48
Fairness Opinion.......................................................... 28
Federal Reserve Board..................................................... 37
12,
Final City National Stock Price........................................... 33
GAAP...................................................................... 38
Harbor.................................................................... 1
Harbor Articles........................................................... 16
Harbor Stock.............................................................. 1
Hoefer & Arnett........................................................... 12
Holder.................................................................... 43
Interested Party.......................................................... 59
Interested Party Proposal................................................. 59
Interested Stockholder.................................................... 51
Letter of Transmittal..................................................... 33
Mailing Date.............................................................. 33
Merger.................................................................... 1
Merger Agreement.......................................................... 1
Munger Tolles............................................................. 15
NYSE...................................................................... 2
OCC....................................................................... 38
Option Plan............................................................... 42
Plan Administrator........................................................ 42
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Preferential Rates........................................................ 44
Purchase Price............................................................ 28
RAP....................................................................... 38
11,
Record Date............................................................... 25
Registration Statement.................................................... 4
Regulatory Approvals...................................................... 35
Repurchase Consideration.................................................. 49
Repurchase Event.......................................................... 49
Restricted Person......................................................... 53
Right Agreement........................................................... 50
Rights.................................................................... 51
SEC....................................................................... 3
Section 203............................................................... 51
Securities Act............................................................ 4
Shareholders' Agreement................................................... 47
Special Meeting........................................................... 1
Spread Value.............................................................. 48
Stock Election............................................................ 33
Substitute Option......................................................... 49
Takeover Proposal......................................................... 39
Trust..................................................................... 42
Undesignated Shares....................................................... 33
Universe.................................................................. 32
</TABLE>
10
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE DESCRIPTION OF ALL
MATERIAL FACTS REGARDING CITY NATIONAL, HARBOR AND THE MATTERS TO BE CONSIDERED
AT THE SPECIAL MEETING AND IS QUALIFIED IN ALL RESPECTS BY THE INFORMATION
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS REFERRED TO
HEREIN. CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS SUMMARY HAVE THE MEANINGS
ASCRIBED TO SUCH TERMS ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. SEE "INDEX
OF CERTAIN DEFINED TERMS."
PARTIES TO THE MERGER
City National is a bank holding company incorporated under the laws of
Delaware, which conducts a commercial banking business through its wholly owned
subsidiary City National Bank. The address of City National's principal
executive offices is 400 North Roxbury Drive, Beverly Hills, California 90210
and its telephone number at that address is (310) 888-6000.
Harbor is a bank holding company incorporated under the laws of California,
which conducts a commercial banking business through its wholly owned subsidiary
Harbor Bank. The address of Harbor's principal executive offices is 11 Golden
Shore, Long Beach, California 90802 and its telephone number at that address is
(562) 491-1111.
See "INTRODUCTION--Parties to the Merger."
SPECIAL MEETING OF SHAREHOLDERS
The Special Meeting will be held in the Catalina Room, Long Beach Hilton, 2
World Trade Center, Long Beach, California, on Tuesday, November 18, 1997 at
2:00 p.m., Pacific Standard Time. The purpose of the Special Meeting is to
consider and vote upon a proposal to approve the Merger Agreement. See "THE
SPECIAL MEETING."
VOTE REQUIRED; RECORD DATE
Only Harbor shareholders of record at the close of business on October 15,
1997 (the "Record Date") will be entitled to vote at the Special Meeting. See
"THE MERGER--Record Date." The affirmative vote of the holders of a majority of
the outstanding shares of Harbor Stock on such date is required to approve the
Merger Agreement. See "THE MERGER--Vote Required." As of the Record Date, there
were 1,415,214 shares of Harbor Stock outstanding.
As of October 10, 1997, directors and executive officers of Harbor
beneficially owned an aggregate of 402,741 shares of Harbor Stock (not including
shares issuable upon exercise of stock options or shares held of record by the
ESOP as to which voting rights are passed through to participants) or
approximately 28.46% of those outstanding. All of Harbor's directors have agreed
to vote their shares in favor of the Merger Agreement and the Merger. See "THE
SPECIAL MEETING--Shareholdings of Certain Beneficial Owners and Harbor's
Management" and "CERTAIN RELATED AGREEMENTS--Shareholders' Agreement."
EFFECT OF THE MERGER
Pursuant to the Merger Agreement, at the Effective Time (see "THE
MERGER--Effective Time"), Harbor will merge with and into City National, with
City National being the surviving corporation. See "THE MERGER--Effect of the
Merger." For information on how Harbor shareholders will be able to exchange
certificates representing shares of Harbor Stock for new certificates
representing shares of City National Stock (and cash in lieu of fractional
shares), and/or cash to be issued to them, see "THE MERGER--Surrender of Harbor
Stock Certificates."
11
<PAGE>
After the Merger, City National shall cause Harbor Bank to merge with and
into City National Bank, a wholly owned subsidiary of City National. See "THE
MERGER--Bank Merger."
CONSIDERATION PAYABLE UPON CONSUMMATION OF THE MERGER.
Each share of Harbor Stock (other than Dissenting Shares and Cancelled
Shares (as defined below)) will, by virtue of the Merger, be converted into the
right to receive either: (1) a fraction of a share of City National Stock equal
to the quotient (such quotient, the "Exchange Ratio") of (a) $24.10, divided by
(b) the average of the daily closing prices of a share of City National Stock on
the NYSE for the twenty consecutive trading days ending on the third trading day
immediately prior to the Effective Time (such average, the "Final City National
Stock Price"); PROVIDED, HOWEVER, in the event (x) the Final City National Stock
Price is more than $31.9125 but less than or equal to $34.6875, the Exchange
Ratio will be 0.7552, (y) the Final City National Stock Price is less than
$23.5875, the Exchange Ratio shall be 1.0217, or (z) the Final City National
Stock Price is greater than $34.6875, the Exchange Ratio shall be 26.20 divided
by the Final City National Stock Price; (2) cash in the amount of $24.10; or (3)
a combination of City National Stock (at the rate of the Exchange Ratio for a
whole share of Harbor Stock) and cash (at the rate of $24.10 for a whole share
of Harbor Stock).
In the aggregate, no less than 48%, and no more than 55%, of the total
consideration paid to holders of Harbor Stock will be in the form of City
National Stock, with the remainder paid in cash. Holders of Harbor Stock will
have the opportunity to indicate their preference for receiving all cash, all
City National Stock or a different proportion of cash and City National Stock.
Such elections will be honored to the extent possible, provided that the Merger
consideration in the aggregate will be at least 48%, and not more than 55%, in
the form of City National Stock. In the event that holders of Harbor Stock
elect, in the aggregate, to convert less than 48% or more than 55% of the total
Merger consideration into shares of City National Stock, certain holders of
Harbor Stock will receive a different prorated number of shares of City National
Stock and a different prorated amount of cash than they had originally indicated
as their preference such that the Merger consideration is at least 48% and no
more than 55% in City National Stock. The fraction of a share of City National
Stock into which each share of Harbor Stock for which an effective "Stock
Election" or "Combination Election" (each as hereinafter defined) is made will
be converted in the Merger cannot be determined until the Effective Time.
Holders of Harbor Stock will not receive fractional shares of City National
Stock. Any such fractional shares will instead be paid in cash.
As used in this Proxy Statement/Prospectus, (1) "Dissenting Shares" means
shares which have not been voted in favor of approval of the Merger Agreement
and with respect to which dissenters' rights have been perfected in accordance
with California law and (2) "Cancelled Shares" means shares of Harbor Stock that
may be owned by Harbor (or any of its wholly owned subsidiaries) as treasury
stock or owned by City National (or any of its wholly owned subsidiaries) other
than shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted.
See "THE MERGER--Consideration Payable Upon Consummation of the Merger."
REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS
HARBOR. The Harbor Board of Directors has unanimously concluded that the
Merger is in the best interests of Harbor and its shareholders and unanimously
recommends that shareholders vote to approve the Merger Agreement and the
Merger. See "THE MERGER--Background of and Reasons for the Merger" and
"--Recommendation of the Harbor Board of Directors." For information on the
interests of certain officers and directors of Harbor in the Merger, see "THE
MERGER--Interests of Certain Persons in the Merger."
CITY NATIONAL. The City National Board of Directors has approved the Merger
Agreement and determined that the Merger and the issuance of the City National
Stock pursuant thereto are in the best
12
<PAGE>
interests of City National and its shareholders. The approval of the Merger
Agreement by the shareholders of City National is not required.
OPINION OF FINANCIAL ADVISOR
Hoefer & Arnett, Inc. ("H&A") has served as financial advisor to Harbor in
connection with the Merger, and has delivered a written opinion to the Harbor
Board of Directors that, as of August 28, 1997, the aggregate consideration to
be paid to Harbor's shareholders as a result of the Merger is fair from a
financial point of view. H&A also delivered to the Harbor Board of Directors on
October 13, 1997 a written confirmation of the August 28, 1997 written opinion.
For additional information, see "THE MERGER--Opinion of Financial Advisor." The
opinion of H&A dated August 28, 1997, is attached as Appendix D to this Proxy
Statement/Prospectus. Shareholders are urged to read such opinion in its
entirety for descriptions of the procedures followed, matters considered and
limitations on the reviews undertaken, in connection therewith.
EFFECTIVE TIME
The Merger will become effective when an Agreement of Merger is filed with
the Secretary of State of the State of Delaware. Such filings will be made on
the first Friday (unless such date is a holiday, in which case it will be the
preceding business day) that is both (a) after satisfaction of each of
conditions set forth in Article VII of the Merger Agreement (see "THE
MERGER--Conditions to Consummation of the Merger") and (b) no less than four
business days after the occurrence of the Election Deadline (as hereinafter
defined).
If all conditions to the Merger, including receipt of all regulatory
approvals and the shareholder approval being sought at the Special Meeting, are
satisfied or waived prior to January 9, 1998, the Merger currently is expected
to be consummated on January 9, 1998 and not, in any event, during 1997.
CONDITIONS; REGULATORY APPROVALS
Consummation of the Merger is subject to various conditions, including (1)
receipt of the shareholder approval solicited hereby, (2) receipt of the
necessary regulatory approvals, (3) that at the close of business on the last
day of the month preceding the Effective Time, the Adjusted Book Value Per Share
(as defined in Section 7.2(e) of the Merger Agreement) of Harbor shall be not
less than $17,200,000 plus or minus the product of (a) $150,000 times (b) the
number of full months in the period subsequent to, or prior to, respectively,
December 31, 1997 and the month-end prior to the Effective Time; (4) that at the
close of business on the last day of the month preceding the Effective Time,
total deposits of Harbor and its subsidiaries shall be not less than 90% of the
average of total deposits for Harbor and its subsidiaries for the six month
period ending on the last day of the same month in the preceding year; (5)
receipt of certain opinions of counsel regarding, among other matters, certain
tax aspects of the Merger; and (6) satisfaction of other closing conditions.
The Merger and the Bank Merger are subject to prior approval by the Federal
Reserve Board and the OCC, respectively, and City National has submitted
applications seeking such approvals. There can be no assurance that such
approvals will be obtained, and, if obtained, that such approvals will not
contain a materially burdensome condition or requirement which would cause such
approvals to fail to satisfy the conditions set forth in the Merger Agreement.
See "THE MERGER--Conditions to Consummation of the Merger," "--Regulatory
Approvals," and "--Conduct of Business Pending the Merger."
13
<PAGE>
CONDUCT OF BUSINESS PENDING MERGER
HARBOR. The Merger Agreement contains certain restrictions on the conduct
of Harbor's business prior to the Effective Date. Certain purposes of these
restrictions are (1) to ensure that Harbor is in substantially the same
condition at the Effective Time as it was in on August 28, 1997, the date of the
Merger Agreement, (2) to ensure that the Effective Time is not unnecessarily
delayed and (3) to preserve the status of the Merger as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code").
CITY NATIONAL. The Merger Agreement also contains certain restrictions on
the conduct of City National's business prior to the Effective Time. Certain
purposes of these restrictions are to ensure (1) that City National does not
impair the value of City National Stock and (2) that the Effective Date is not
unnecessarily delayed.
See "THE MERGER--Conduct of Business Pending the Merger."
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, either before or after its approval by the shareholders of Harbor, (1) by
the mutual agreement of Harbor and City National, (2) by Harbor if the Final
City National Stock Price is less than $17.00, or (3) by either City National or
Harbor under certain specified circumstances, including the failure of the
Merger to be effective by March 31, 1998, unless such failure is due to the
breach of any covenant or obligation contained in the Merger Agreement by the
party seeking to terminate. See "THE MERGER--Amendment and Termination."
Following the Special Meeting, in the event the Final City National Stock
Price is less than $17.00, the Harbor Board of Directors will have the
discretion, without the necessity of a further vote of the Harbor shareholders,
to determine whether or not to proceed with the Merger. In exercising such
discretion, the Harbor Board of Directors anticipates that it would review
current information and consider a variety of factors including those which it
considered in making its initial decision to enter into the Merger Agreement.
Based thereon, the Board of Directors may or may not determine to exercise
Harbor's right to terminate the Merger Agreement. See "THE MERGER--Background of
and Reasons for the Merger."
BANK MERGER
After the Effective Time, City National shall cause Harbor Bank to merge
with and into City National Bank, with City National Bank as the surviving
corporation (the "Bank Merger") subject to receipt of necessary regulatory
approvals. There can be no assurance that such approvals will be obtained or
that the Bank Merger will be consummated. Upon consummation of the Bank Merger,
the directors of City National Bank immediately prior to the Bank Merger will be
the directors of the surviving corporation. See "THE MERGER--Bank Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of October 10, 1997, the directors and executive officers of Harbor
(including the executive officers of Harbor Bank) beneficially owned 402,741
shares of Harbor Stock (not including shares such persons may acquire through
the exercise of vested stock options and shares held of record by the ESOP as to
which voting rights have been passed through to participants), which will be
converted into the right to receive cash or City National Stock or both at the
Effective Time in the same manner as will the shares of Harbor Stock held by all
other Harbor shareholders. In addition, directors and executive officers of
Harbor (including the executive officers of Harbor Bank) held as of such date
options to purchase 67,137 shares of Harbor Stock, which in connection with the
Merger will either be exercised or canceled in exchange for certain cash
payments or, if the director or executive officer is offered employment with
City National or
14
<PAGE>
City National Bank, exchanged at the option of the director or executive officer
for similar options for City National Stock. Immediately after the Effective
Time, former directors and executive officers of Harbor as a group will own less
than 1% of the outstanding shares of City National Stock.
Messrs. Dallas E. Haun and Phillip J. Bond, executive officers of Harbor
Bank, each have employment agreements with Harbor Bank that provide certain
benefits upon termination of their employment with Harbor Bank or, in the case
of Mr. Bond, a change in control of Harbor Bank. It is a condition to City
National's obligations under the Merger Agreement that Mr. James H. Gray and Mr.
Haun shall have each agreed to an employment arrangement with City National.
City National and each of Messrs. Gray and Haun have agreed to mutually
satisfactory terms for each such employment arrangement.
Harbor and Harbor Bank have also previously entered into indemnification
agreements with each of the directors and executive officers of Harbor and
Harbor Bank. The Merger Agreement provides that all rights to indemnification in
favor of the directors and officers of Harbor and Harbor Bank in effect as of
the date of the Merger Agreement will survive the Merger and will continue in
full force and effect. City National also agreed that following the consummation
of the Merger, to the fullest extent permitted by Delaware law, the City
National Certificate of Incorporation and the City National Bylaws, it would
indemnify, defend and hold harmless individuals who were directors or officers
of Harbor and Harbor Bank for any claim or loss arising out of their actions
while a director or officer and shall pay the expenses, including attorneys'
fees, of such individual in advance of the final resolution of any claim,
provided such individual first executes an undertaking acceptable to City
National to return such advances in the event it is finally concluded that such
indemnification is not allowed under applicable law.
See "THE MERGER--Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Harbor has received an opinion from Munger, Tolles & Olson LLP, special
counsel to City National ("Munger Tolles"), to the effect that, on the basis of
facts, representations, assumptions and agreements set forth or referred to
therein, for U.S. federal income tax purposes, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code. Consummation of
the Merger is conditioned upon receipt by Harbor of an updated opinion from
Munger Tolles confirming the opinion already received. See "THE
MERGER--Conditions to Consummation of the Merger." If the Merger qualifies as a
reorganization within the meaning of Section 368(a) of the Code, then, in
general (i) a shareholder who exchanges shares solely for cash will recognize
capital gain or loss equal to the difference between the amount of cash received
and the adjusted basis in the shares of Harbor Stock surrendered therefor, (ii)
a shareholder who exchanges shares solely for shares of City National Stock will
not recognize any gain or loss except with respect to cash received in lieu of a
fractional share of City National Stock and (iii) a shareholder who exchanges
shares for a combination of City National Stock and cash will recognize gain
equal to the lesser of (a) the excess of the sum of the cash and fair market
value of City National Stock received over the tax basis in the shares exchanged
and (b) the amount of cash received. Certain exceptions and/or other
considerations may apply to the above. See "THE MERGER--Certain Federal Income
Tax Considerations."
ACCOUNTING TREATMENT
The Merger will be accounted for by City National under the purchase method
of accounting. See "THE MERGER--Accounting Treatment."
SHAREHOLDERS' AGREEMENT
Each of the directors of Harbor has agreed, pursuant to a Shareholders'
Agreement, to vote all shares of Harbor Stock owned or acquired by him or her in
favor of the Merger and the Merger Agreement and the other matters contemplated
by the Merger Agreement.
15
<PAGE>
In addition, each of the directors has agreed to vote his or her shares of
Harbor Stock against any action that would constitute a breach by Harbor of the
Merger Agreement or that could interfere with or delay the contemplated economic
benefits to City National of the Merger or the Stock Option Agreement and
against extraordinary corporate transactions, changes in the majority of the
board of Harbor or other material changes.
STOCK OPTION AGREEMENT
Concurrently with the execution and delivery of the Merger Agreement, and as
a condition and inducement thereto, City National and Harbor entered into the
Stock Option Agreement, pursuant to which Harbor granted City National an option
to purchase up to 282,901 newly issued shares of Harbor Stock at a price per
share of $18.00. The consummation of a purchase or a repurchase pursuant to the
Stock Option Agreement may be subject to, among other things, obtaining any
required regulatory approvals. See "CERTAIN RELATED AGREEMENTS--Stock Option
Agreement."
DISSENTERS' RIGHTS
Holders of Harbor Stock who vote against the Merger and make a written
demand upon Harbor for the purchase of dissenting shares in accordance with the
provisions of Chapter 13 of the California General Corporation Law ("California
Code") will be entitled to receive an amount equal to the fair market value of
their shares as of August 27, 1997, the last trading day before the public
announcement of the Merger. See "DISSENTER'S RIGHTS--Rights of Dissenting
Shareholders."
CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS
Harbor shareholders' rights are currently governed by California law, the
Harbor Articles of Incorporation (the "Harbor Articles") and the Harbor Bylaws.
Upon consummation of the Merger, shareholders of Harbor Stock receiving City
National Stock will become stockholders of City National and their rights as
such will be governed by Delaware law, the City National Certificate and the
City National Bylaws. See "COMPARISON OF RIGHTS OF HOLDERS OF CITY NATIONAL
STOCK AND HARBOR STOCK."
MARKETS AND MARKET PRICES
The City National Stock is listed on the NYSE under the symbol "CYN" and the
Harbor Stock is traded on the over-the-counter market. The closing price per
share of City National Stock, as reported on the NYSE Composite Tape, and the
closing bid price for Harbor Stock, as reported to Harbor by one or more parties
involved in certain privately negotiated purchases and sales of the Harbor Stock
as of August 27, 1997, the last trading day before the day on which City
National and Harbor executed the Merger Agreement, and as of October 10, 1997
were as follows:
<TABLE>
<CAPTION>
CITY NATIONAL
STOCK HARBOR STOCK
------------------ ------------
<S> <C> <C>
August 27, 1997...................................................... $ 27.8125 $ 19.625
October 10, 1997..................................................... $ 31.1875 $ 23.375
</TABLE>
The shares of City National Stock issued in connection with the Merger will
be listed on the NYSE. See "INTRODUCTION--Markets and Market Prices."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following sets forth selected consolidated historical financial and
other data for City National and its consolidated subsidiaries and Harbor and
its consolidated subsidiaries as of, and for each of the five years ended,
December 31, 1996 and as of, and for the six months ended, June 30, 1996 and
1997. Such data should be read in conjunction with, and is qualified in its
entirety by, the more detailed information, Management's Discussion and Analysis
of Financial Condition and Results of Operations and the consolidated financial
statements and notes thereto accompanying this Proxy Statement/Prospectus or in
the documents described under "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
PROVISION OF CERTAIN OF HARBOR'S REPORTS."
CITY NATIONAL
The selected consolidated balance sheet data for the years ended December
31, 1995 and 1996 and the consolidated statement of operations data for the
years ended December 31, 1994 through 1996 are derived from the consolidated
financial statements of City National incorporated in this Proxy Statement/
Prospectus by reference, which financial statements have been audited by KPMG
Peat Marwick LLP, independent auditors. The selected consolidated balance sheet
data presented below as of December 31, 1993 and 1994 and the consolidated
statement of operations data presented below for the year ended December 31,
1993, are derived from financial statements of City National not included herein
which have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The selected consolidated balance sheet data presented below as of
December 31, 1992 and the consolidated statement of operations data presented
below for the year ended December 31, 1992, are derived from financial
statements of City National not included herein which have been audited by other
independent certified public accountants. The selected consolidated balance
sheet data as of June 30, 1996 and 1997 and the selected consolidated statement
of operations data for the six months ended June 30, 1996 and 1997 have been
derived from City National's unaudited consolidated financial statements.
Operating results for the six months ended June 30, 1997 may not be indicative
of the results that may be expected for the year ending December 31, 1997 or any
future period.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
NUMBERS IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income........ $ 172,003 $ 136,090 $ 282,123 $ 217,594 $ 181,825 $ 169,792 $ 233,049
Interest expense....... 49,439 38,866 82,389 55,331 38,414 41,996 84,433
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net interest income.... 122,564 97,224 199,734 162,263 143,411 127,796 148,616
Provision for credit
losses............... -- -- -- -- 7,535 60,163 128,878
Noninterest income
(other than gains and
losses on securities
transactions)........ 26,578 21,050 43,808 35,162 36,180 45,810 45,365
Gains (losses) on
securities
transactions......... (539) 292 187 (596) (3,383) -- 1,629
Noninterest expense
(other than ORE and
consolidation
charge).............. 89,272 70,036 144,795 118,684 121,296 129,226 150,546
Consolidation charge... -- -- -- -- -- 12,000 --
ORE expense (income)... (33) (41) (200) (608) (5,297) (4,489) 8,788
----------- ----------- ----------- ----------- ----------- ------------ ------------
Income (loss) from
continuing operations
before taxes......... 59,364 48,571 99,134 78,753 52,674 (23,294) (92,602)
Income taxes
(benefit)............ 21,803 16,703 32,571 29,961 15,511 (9,260) (32,450)
----------- ----------- ----------- ----------- ----------- ------------ ------------
Income (loss) from
continuing
operations........... 37,561 31,868 66,563 48,792 37,163 (14,034) (60,152)
Income from
discontinued
operations........... -- -- -- -- -- 7,128 804
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net income (loss).... $ 37,561 $ 31,868 $ 66,563 $ 48,792 $ 37,163 $ (6,906) $ (59,348)
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
PER SHARE DATA:
Income (loss) per share
from continuing
operations........... $ 0.79 $ 0.71 $ 1.47 $ 1.06 $ 0.81 $ (0.35) $ (1.87)
Net income (loss) per
share................ 0.79 0.71 1.47 1.06 0.81 (0.17) (1.84)
Cash dividends
declared............. 0.22 0.18 0.36 0.26 0.05 -- --
Book value per share... 10.25 8.42 9.13 8.19 7.32 6.62 7.07
Shares used to compute
income (loss) per
share................ 47,678 44,848 45,146 45,886 45,626 39,580 32,240
BALANCE SHEET DATA--AT
PERIOD END:
Assets................. $ 4,710,444 $ 3,857,884 $ 4,216,496 $ 4,157,551 $ 3,012,775 $ 3,100,626 $ 3,514,102
Loans.................. 3,446,452 2,547,725 2,839,435 2,346,611 1,643,918 1,628,803 2,167,992
Securities............. 826,441 849,487 811,092 975,407 749,435 904,481 443,922
Interest-earning
assets............... 4,320,596 3,479,719 3,844,834 3,784,245 2,716,524 2,838,698 3,105,978
Deposits............... 3,657,070 2,850,999 3,386,523 3,248,035 2,417,762 2,526,767 2,911,276
Shareholders' equity... 472,215 368,058 400,747 366,957 330,721 298,074 227,944
BALANCE SHEET
DATA--AVERAGE BALANCES:
Assets................. $ 4,556,118 $ 3,699,136 $ 3,821,314 $ 2,849,807 $ 2,831,471 $ 2,944,461 $ 3,918,949
Loans.................. 3,234,589 2,400,400 2,539,323 1,758,671 1,537,997 1,762,663 2,403,657
Securities............. 836,928 840,571 839,564 705,122 854,823 517,059 548,734
Interest-earning
assets............... 4,141,879 3,379,082 3,505,422 2,624,436 2,594,241 2,623,164 3,550,920
Deposits............... 3,488,849 2,813,861 2,871,870 2,062,412 2,241,175 2,380,106 3,133,109
Shareholders' equity... 457,322 363,367 373,491 350,551 313,196 260,649 259,629
ASSET QUALITY:
Nonaccrual loans....... $ 40,782 $ 46,852 $ 41,543 $ 48,124 $ 58,801 $ 79,303 $ 253,089
ORE.................... 10,238 15,691 15,116 7,439 4,726 2,052 8,637
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total nonaccrual
loans and ORE...... $ 51,020 $ 62,543 $ 56,659 $ 55,563 $ 63,527 $ 81,355 $ 261,726
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
Assets held for
accelerated
disposition.......... $ -- $ -- $ -- $ -- $ -- $ 17,450 $ --
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
PERFORMANCE RATIOS:
Return on average
assets............... 1.66% 1.73% 1.74% 1.71% 1.31% (0.23)% (1.51)%
Return on average
shareholders'
equity............... 16.56 17.64 17.82 13.92 11.87 (2.65) (22.84)
Net interest spread.... 4.71 4.57 4.47 4.84 4.60 4.12 3.44
Net interest margin.... 6.15 5.93 5.87 6.26 5.57 4.92 4.30
Average shareholders'
equity to average
assets............... 10.04 9.82 9.77 12.30 11.06 8.85 6.62
Dividend payout
ratio................ 27.09 24.87 23.76 24.09 6.08 -- --
ASSET QUALITY RATIOS:
Nonaccrual loans to
total loans.......... 1.18% 1.84% 1.46% 2.05% 3.58% 4.87% 11.67%
Nonaccrual loans and
ORE to total
assets............... 1.08 1.62 1.34 1.34 2.11 2.62 7.45
Allowance for credit
losses to total
loans................ 3.86 5.00 4.58 5.60 6.41 6.78 6.28
Allowance for credit
losses to nonaccrual
loans . 325.84 271.69 313.14 273.28 179.15 139.34 53.77
Net charge offs
(recoveries) to
average loans........ 0.26 0.36 0.06 (0.40) 0.83 4.78 4.93
</TABLE>
18
<PAGE>
HARBOR
The selected consolidated balance sheet data presented below for the years
ended December 31, 1995 and 1996 and of the consolidated statement of operations
data presented below for the years ended December 31, 1994, 1995 and 1996 are
derived from the consolidated financial statements of Harbor included as part of
Harbor's Annual Report on Form 10-KSB for the year ended December 31, 1996
provided with this Proxy Statement/Prospectus, which financial statements have
been audited by Ernst & Young LLP, independent certified public accountants. The
selected consolidated balance sheet data presented below as of December 31,
1992, 1993 and 1994 and the consolidated statement of operations data presented
below for the years ended December 31, 1992 and 1993, are derived from financial
statements of Harbor not included herein which have been audited by Ernst &
Young LLP, independent certified public accountants. The selected consolidated
balance sheet data as of June 30, 1996 and 1997 and the consolidated statement
of operations data for the six months ended June 30, 1996 and 1997 have been
derived from Harbor's unaudited consolidated financial statements. Operating
results for the six months ended June 30, 1997 may not be indicative of the
results that may be expected for the year ending December 31, 1997 or any future
period.
19
<PAGE>
SELECTED FINANCIAL INFORMATION
IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................ $ 7,769 $ 7,292 $ 15,088 $ 14,098 $ 11,953 $ 12,258 $ 12,716
Interest expense........................... 1,588 1,413 3,059 2,642 2,006 1,917 2,548
--------- --------- --------- --------- --------- ---------- ---------
Net interest income........................ 6,181 5,879 12,029 11,456 9,947 10,341 10,168
Provision for credit losses................ 435 444 1,159 313 1,088 2,958 484
Noninterest income (other than gains and
losses on securities transactions)....... 565 598 1,171 1,092 1,132 1,103 929
Gains (losses) on securities
transactions............................. -- -- 19 54 (1) 146 12
Noninterest expense........................ 5,002 5,193 10,006 9,984 9,220 9,579 9,145
ORE expense (income)....................... 65 100 174 387 592 211 69
--------- --------- --------- --------- --------- ---------- ---------
Income (loss) before taxes................. 1,244 740 1,880 1,918 178 (1,158) 1,411
Income taxes (benefit)..................... 467 279 683 679 20 (497) 568
--------- --------- --------- --------- --------- ---------- ---------
Net income (loss)........................ $ 777 $ 461 $ 1,197 $ 1,239 $ 158 $ (661) $ 843
--------- --------- --------- --------- --------- ---------- ---------
--------- --------- --------- --------- --------- ---------- ---------
PER SHARE DATA:
Net income (loss) per share................ $ 0.54 $ 0.32 $ 0.83 $ 0.88 $ 0.11 $ (0.47) $ 0.60
Cash dividends declared.................... 0.125 -- -- -- -- -- 0.250
Book value per share....................... 11.52 10.54 11.09 10.80 9.74 10.20 11.80
Shares used to compute income (loss) per
share.................................... 1,449 1,434 1,434 1,415 1,415 1,415 1,415
BALANCE SHEET DATA--AT PERIOD END:
Assets..................................... $ 212,853 $ 198,489 $ 200,103 $ 195,092 $ 176,465 $ 191,052 $ 168,115
Loans...................................... 148,671 132,858 143,988 130,412 114,850 120,508 110,281
Securities................................. 11,219 23,347 24,852 34,983 34,819 41,454 18,015
Interest-earning assets.................... 190,885 180,200 177,735 171,090 155,164 165,353 148,890
Deposits................................... 195,403 182,605 183,432 179,205 162,112 176,002 153,397
Shareholders' equity....................... 16,299 14,921 15,700 14,556 13,135 13,096 13,751
BALANCE SHEET DATA--AVERAGE BALANCES:
Assets..................................... $ 198,075 $ 196,280 $ 195,491 $ 181,370 $ 173,570 $ 177,023 $ 165,337
Loans...................................... 146,099 129,936 133,951 118,986 116,535 112,023 108,226
Securities................................. 11,580 25,669 24,940 28,698 20,761 16,561 16,729
Interest-earning assets.................... 178,969 175,063 175,954 162,875 151,737 154,762 145,804
Deposits................................... 180,399 178,942 179,399 165,998 157,277 159,631 151,325
Shareholders' equity....................... 16,220 14,791 15,007 13,776 13,340 13,783 13,239
ASSET QUALITY:
Nonaccrual loans........................... $ 3,210 $ 6,558 $ 3,783 $ 6,746 $ 5,740 $ 4,870 $ 4,841
ORE........................................ 549 1,613 329 516 2,814 3,585 2,345
--------- --------- --------- --------- --------- ---------- ---------
Total nonaccrual loans and ORE........... $ 3,759 $ 8,171 $ 4,112 $ 7,262 $ 8,554 $ 8,455 $ 7,186
--------- --------- --------- --------- --------- ---------- ---------
--------- --------- --------- --------- --------- ---------- ---------
PERFORMANCE RATIOS:
Return on average assets (1)............... 0.78% 0.47% 0.61% 0.68% 0.09% (0.37)% 0.51%
Return on average shareholders'
equity (1)............................... 9.58 6.23 7.98 8.99 1.18 (4.79) 6.37
Net interest spread (1).................... 5.33 5.26 5.29 5.75 5.47 5.25 5.19
Net interest margin (1).................... 6.91 6.72 6.84 7.03 6.56 6.68 6.97
Average shareholders' equity/average
assets . 8.19 7.54 7.68 7.60 7.69 7.79 8.01
Dividend payout ratio...................... 23.15 -- -- -- -- -- 41.96
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans............ 2.16% 4.94% 2.63% 5.17% 5.00% 4.04% 4.39%
Nonaccrual loans and ORE to total assets... 1.77 4.12 2.05 3.72 4.85 4.43 4.27
Allowance for credit losses to total
loans.................................... 1.90 2.16 1.90 2.30 2.81 3.04 1.23
Allowance for credit losses to nonaccrual
loans.................................... 88.13 43.76 72.35 44.52 56.17 75.30 27.99
Net charge offs (recoveries) to average
loans.................................... 0.23 0.44 1.06 0.45 1.31 1.12 0.15
</TABLE>
- ------------------------------
(1) Ratios for the six months ended June 30, 1997 and 1996 have been annualized.
20
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
The following table presents selected pro forma condensed combined financial
information as of June 30, 1997 and for the year ended December 31, 1996 and for
the six months ended June 30, 1997 as if the Merger had been effective on
January 1, 1996 and January 1, 1997, respectively, after giving effect to the
purchase accounting and other Merger-related adjustments described in the
respective Notes to Pro Forma Condensed Combined Financial Statements. See "PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION." The selected pro forma
condensed combined financial information reflect the Merger being completed at
an assumed Final City National Stock Price equal to $29.975, the average of the
City National Stock closing price in the twenty day period ended September 22,
1997. Because the Exchange Ratio floats if the Final City National Stock Price
is between $23.5875 and $31.9125, the amount of goodwill and the consequent
goodwill amortization will not change as long as the Final City National Stock
Price is between $23.5875 and $31.9125. The selected pro forma condensed
combined financial information table is intended for illustrative purposes only
and is not necessarily indicative of future financial positions or results of
operations of City National after the Merger or of the financial position or
results of operations that would have occurred had the Merger been in effect as
of the dates or the periods presented.
<TABLE>
<CAPTION>
FOR THE
AT OR FOR THE YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
-------------------- ------------
<S> <C> <C>
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
BALANCE SHEET DATA:
Total assets............................................................... $ 4,927,617
Net loans.................................................................. 3,459,409
Securities................................................................. 837,660
Deposits................................................................... 3,852,473
Shareholders' equity....................................................... 490,974
STATEMENT OF INCOME DATA:
Total interest income...................................................... $ 181,543 $ 333,126
Total interest expense..................................................... 51,698 97,203
Provision for credit losses................................................ 435 1,234
Net interest income after provision for loan losses........................ 129,410 234,689
Other income............................................................... 26,944 49,943
Other expense.............................................................. 100,257 188,961
Income before income taxes................................................. 56,097 95,671
Income tax expense......................................................... 20,885 31,895
Net income................................................................. 35,212 63,776
Cash dividends paid........................................................ 10,270 16,402
PRO FORMA PER SHARE DATA:
Net income per share....................................................... $ 0.73 $ 1.33
Cash dividends declared per share.......................................... 0.22 0.35
Book value per share....................................................... 10.51
PRO FORMA EQUIVALENT PER SHARE:
Net income per share....................................................... $ 0.58 $ 1.07
Cash dividends per share................................................... 0.18 0.28
Book value per share....................................................... 8.45
</TABLE>
21
<PAGE>
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following unaudited financial information reflects certain comparative
per share data relating to net income, cash dividends and book value per common
share (1) on a historical basis for City National and Harbor, (2) on a pro forma
combined basis per share of City National Stock giving effect to the Merger and
(3) on an equivalent pro forma basis per share of Harbor Stock giving effect to
the Merger. The pro forma combined information and the Harbor pro forma
equivalent information give effect to the Merger on a purchase accounting basis
and reflect the assumed Final City National Stock Price as discussed in the Pro
Forma Condensed Combined Financial Information. There can be no assurance as to
what the market price of the City National Stock will be if and when the Merger
is consummated. See "MARKETS AND MARKET PRICES." For a description of purchase
accounting with respect to the Merger, see "THE MERGER--Accounting Treatment"
and "PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION." The information shown
below is for information purposes only and should be read in conjunction with
the historical consolidated financial statements of Harbor and City National,
including the respective notes thereto, which in the case of Harbor, appear as
Appendices E and F to this Proxy Statement/Prospectus, and in the case of City
National, are incorporated by reference in this Proxy Statement/Prospectus, and
the unaudited pro forma financial statements, including the notes thereto,
included in this Proxy Statement/Prospectus. Results of Harbor and City National
for the six months ended June 30, 1997 are not necessarily indicative of the
results which may be expected for any other interim period or for the year as a
whole. The pro forma financial data are not necessarily indicative of results
that actually would have occurred had the Merger been consummated on the date
indicated or that may be obtained in the future. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE DECEMBER 31,
30, 1997 1996
------------- ---------------
<S> <C> <C>
NET INCOME PER COMMON SHARE:
City National historical............................................................. $ 0.79 $ 1.47
Harbor historical.................................................................... 0.54 0.83
Pro forma combined City National and Harbor(1)....................................... 0.73 1.33
Harbor pro forma equivalent(2)....................................................... 0.58 1.07
CASH DIVIDENDS PAID PER COMMON SHARE(3):
City National historical............................................................. $ 0.22 $ 0.36
Harbor historical.................................................................... 0.125 --
Pro forma combined City National and Harbor(4)....................................... 0.22 0.35
BOOK VALUE PER COMMON SHARE (END OF PERIOD):
City National historical............................................................. $ 10.25
Harbor historical.................................................................... 11.52
Pro forma combined City National and Harbor.......................................... 10.51
Harbor pro forma equivalent(5)....................................................... 8.45
</TABLE>
- ------------------------
(1) Represents the pro forma combined information of City National and Harbor as
if the Merger were consummated on January 1, 1997 and January 1, 1996,
respectively, and accounted for as a purchase.
(2) Represents the pro forma combined information of City National and Harbor
multiplied by the exchange ratio of a share of City National Stock for 55%
of the shares of Harbor Stock for the respective time period at an assumed
Final City National Stock Price of $29.975.
(3) See INTRODUCTION--"Markets and Market Prices."
(4) Represents the historical dividends paid by City National divided by the pro
forma shares outstanding including the shares of Harbor which would become
City National Stock.
(5) Represents the pro forma combined information of City National and Harbor as
if the Merger were consummated on June 30, 1997 and accounted for as a
purchase.
22
<PAGE>
INTRODUCTION
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of Harbor
Stock in connection with the solicitation of proxies by the Board of Directors
of Harbor for use at the Special Meeting of Harbor shareholders to be held in
the Catalina Room, Long Beach Hilton, 2 World Trade Center, Long Beach,
California, on Tuesday, November 18, 1997, at 2:00 p.m., Pacific Standard Time,
and at any adjournments or postponements thereof.
At the Special Meeting, the shareholders of record of Harbor Stock as of the
close of business on October 15, 1997, will consider and vote upon a proposal to
approve the Merger Agreement pursuant to which Harbor will merge with and into
City National. Upon consummation of the Merger, each outstanding share of Harbor
Stock (other than Dissenting Common Stock and Cancelled Shares will be converted
into the right to receive, at the election of the holder thereof either: (1)
shares of City National Stock calculated as described herein; (2) $24.10 in
cash; or (3) a combination of City National Stock and cash, calculated as
described herein. See "THE SPECIAL MEETING" and "THE MERGER--Consideration
Payable Upon Consummation of the Merger." The City National Board of Directors
has approved the Merger and issuance of the shares of City National Stock to be
issued upon consummation of the Merger. Approval of the shareholders of City
National is not required for the Merger or issuance of the shares of City
National Stock.
This Proxy Statement/Prospectus also constitutes a prospectus of City
National in respect of the shares of City National Stock to be issued in
connection with the Merger.
PARTIES TO THE MERGER
CITY NATIONAL. City National is a bank holding company which conducts a
commercial banking business through its wholly owned subsidiary, City National
Bank. City National Bank, which was founded in 1953, conducts business in
Southern California and operates 33 banking offices in Los Angeles, Orange,
Riverside, San Diego and Ventura counties. As of June 30, 1997, City National
had total consolidated assets of approximately $4.7 billion, total deposits of
approximately $3.7 billion and shareholders' equity of approximately $472.2
million.
City National Bank primarily serves middle-market companies, professional
and business borrowers and associated individuals with commercial banking and
fiduciary needs.
City National's executive offices are located at 400 North Roxbury Drive,
Beverly Hills, California 90210, and its telephone number is (310) 888-6000.
City National is a Delaware corporation. Additional information about City
National and City National Bank is included in documents incorporated by
reference into this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE; PROVISION OF CERTAIN OF HARBOR'S REPORTS."
HARBOR. Harbor is a bank holding company which conducts a commercial
banking business through its subsidiary bank, Harbor Bank. As of June 30, 1997,
Harbor had total consolidated assets of $212.9 million, total deposits of $195.4
million and total shareholders' equity of $16.3 million.
Harbor Bank is a California state-chartered bank operating in Southern
California. Harbor Bank conducts its banking operations through six branch
offices located in the following Southern California communities: Long Beach
(2), Los Alamitos, Irvine, Fountain Valley and Huntington Beach. Harbor Bank
provides commercial banking services to small to medium sized businesses,
professional firms and individuals in its market areas.
The principal executive offices of Harbor are located at 11 Golden Shore,
Long Beach, California 90802, and its telephone number at that address is (562)
491-1111.
23
<PAGE>
MARKETS AND MARKET PRICES
The City National Stock is listed on the NYSE under the symbol "CYN" and the
Harbor Stock is traded on the over-the-counter market under the symbol "HABN".
The following table sets forth the high and low closing price per share of City
National Stock, as reported on the NYSE Composite Tape, and high bid and low ask
prices for Harbor Stock, as reported to Harbor during the periods indicated by
one or more parties involved in certain privately negotiated purchases and sales
of the Harbor Stock. The high bid and low ask prices for Harbor Stock represent
only transactions reported to Harbor and may not be representative of all trades
during the time periods selected. No attempt has been made by Harbor to verify
the accuracy of sales information furnished to it by third parties. The Harbor
prices listed below have been adjusted for a 5% stock dividend paid by Harbor on
April 19, 1996.
<TABLE>
<CAPTION>
CITY NATIONAL STOCK
HARBOR STOCK
-------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- -------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1995
First....................................................... $ 12.38 $ 10.00 $ 7.75 $ 6.50
Second...................................................... 11.75 9.75 8.50 7.00
Third....................................................... 15.38 11.25 10.00 7.50
Fourth...................................................... 14.25 12.63 11.00 8.875
1996
First....................................................... 14.13 12.63 10.797 9.82
Second...................................................... 16.50 13.13 10.375 9.75
Third....................................................... 19.00 14.63 11.00 9.00
Fourth...................................................... 22.25 17.38 12.75 10.625
1997
First....................................................... 25.37 20.37 15.00 11.75
Second...................................................... 25.50 20.88 18.00 14.25
Third....................................................... 32.00 24.69 23.25 17.00
Fourth (through October 10)................................. 32.38 31.00 23.63 23.25
</TABLE>
The closing price per share of City National Stock, as reported on the NYSE
Composite Tape, and the closing bid price per share of Harbor Stock, as reported
to Harbor by one or more parties involved in certain privately negotiated
purchases and sales of the Harbor Stock as of August 27, 1997, the last trading
day before the day on which City National and Harbor executed the Merger
Agreement, and October 10, 1997 were as follows:
<TABLE>
<CAPTION>
CITY NATIONAL
STOCK HARBOR STOCK
------------------ ------------
<S> <C> <C>
August 27, 1997...................................................... $ 27.8125 $ 19.625
October 10, 1997..................................................... 31.1875 23.375
</TABLE>
Following the Merger, the Harbor Stock will no longer exist and, as a
result, will no longer be traded on the over-the-counter market. The shares of
City National Stock issued in connection with the Merger will be listed on the
NYSE.
24
<PAGE>
THE SPECIAL MEETING
RECORD DATE
The Harbor Board of Directors has fixed the close of business on October 15,
1997 as the Record Date for the determination of shareholders entitled to notice
of, and to vote at, the Special Meeting. Accordingly, only holders of record of
shares of Harbor Stock on the Record Date will be entitled to vote at the
Special Meeting. As of the Record Date, there were 1,415,214 shares of Harbor
Stock outstanding held by approximately 400 shareholders of record.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the Special Meeting and if a
shareholder does not return the signed proxy card, such holder's shares will not
be voted and this will have the effect of a vote "AGAINST" the approval of the
Merger Agreement and the Merger. Shareholders are urged to mark the box on the
proxy card to indicate how their shares are to be voted. If a shareholder
returns a signed proxy card but does not indicate how the shares represented by
the proxy card are to be voted, such shares will be voted "FOR" approval of the
Merger Agreement and the Merger. The proxy card also confers discretionary
authority on the proxy holder to vote the shares represented thereby on any
other matter that is properly presented for action at the Special Meeting. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting by delivering an instrument of revocation to the
Secretary of Harbor, by duly executing and submitting a proxy card bearing a
later date, or by appearing at the Special Meeting and voting in person.
However, the mere presence at the Special Meeting of the shareholder who has
given a proxy will not revoke such proxy. In addition, brokers who hold shares
of Harbor Stock as nominees will not have discretionary authority to vote such
shares in connection with the proposal to approve the principal terms of the
Merger Agreement in the absence of instructions from the beneficial owners.
Proxies will be solicited through the use of the mails. In addition, certain
directors, officers and employees of Harbor may solicit proxies (for no
additional compensation) by personal interview, telephone, telegram or similar
means of communication.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding shares of Harbor Stock is necessary to
constitute a quorum at the Special Meeting. Abstentions will be counted for
purposes of establishing a quorum and broker non-votes will not be counted for
purposes of establishing a quorum.
VOTE REQUIRED
Harbor shareholders are entitled to one vote at the Special Meeting for each
share of Harbor Stock held of record by them on the Record Date. The proposal
concerning the approval of the Merger Agreement and the Merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Harbor Stock. Abstentions and broker non-votes will have the same effect as a
vote "AGAINST" the proposal, except for purposes of entitlement to dissenters'
rights. See "DISSENTERS' RIGHTS".
As of October 10, 1997, directors and executive officers of Harbor
beneficially owned an aggregate of 402,741 shares of Harbor Stock (not including
shares issuable upon exercise of stock options and shares held of record by the
ESOP as to which voting rights have been passed through to participants) or
approximately 28.46% of the shares outstanding as of that date. All of Harbor's
directors have agreed to vote their shares in favor of the Merger Agreement and
the Merger. See "CERTAIN RELATED AGREEMENTS--Shareholders' Agreement."
As of October 10, 1997, City National beneficially owned 48,145 shares of
Harbor Stock.
25
<PAGE>
SHAREHOLDINGS OF CERTAIN BENEFICIAL OWNERS AND HARBOR'S MANAGEMENT
Management of Harbor knows of no person, other than Mr. James H. Gray, the
Harbor Bank Employee Stock Ownership Plan, and Mr. James A. Willingham, who
owns, beneficially or of record, either individually or as a group, five percent
or more of the outstanding shares of Harbor Stock. The following table sets
forth, as of October 10, 1997, the number and percentage of shares of
outstanding Harbor Stock beneficially owned, directly or indirectly, by each of
Harbor's directors and executive officers, principal shareholders, and by the
directors and officers of Harbor as a group. "Beneficial owner" of a security
includes any person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or shares: (a) voting
power, which includes the power to vote, or to direct the voting of such
security; and/or (b) investment power, which includes the power to dispose, or
to direct the disposition of such security. "Beneficial owner" also includes any
person who has the right to acquire beneficial ownership of such security as
defined above within 60 days of October 10, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- ------------------------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
James H. Gray(3)............................................................... 134,251(4) 9.37
John W. Hancock................................................................ 4,377 *
Dallas E. Haun................................................................. 53,282(5) 3.66
Kermit Q. Jones................................................................ 55,590(6) 3.93
Robert E. Leslie............................................................... 837 *
Dorothy K. Matteson............................................................ 38,741(7) 2.74
Malcolm C. Todd................................................................ 48,145 3.40
James A. Willingham(8)......................................................... 81,524 5.76
Margaret E. Wilson............................................................. 41,804(9) 2.95
Harbor Bank Employee Stock Ownership Plan,
Melissa Lanfre, Trustee(3)................................................... 120,649(10) 8.53
Total for Directors and Executive Officers (numbering 11)...................... 568,538(11) 37.99
</TABLE>
- ------------------------
* Less than 1%.
(1) Unless noted below, and subject to applicable community property laws, each
person has sole voting and investment powers with respect to such shares.
(2) Shares subject to options are treated as issued and outstanding for the
purpose of computing the percent of the class owned by such person (or
group), but not for the purpose of computing the percent of the class owned
by any other person (or group).
(3) The address for these shareholders is c/o Harbor Bancorp, 11 Golden Shore,
Long Beach, CA 90802.
(4) Includes 40 shares held by Mr. Gray's spouse, 16,577 shares subject to
stock options that will be vested at the Effective Time and 13,332 shares
allocated to Mr. Gray's account in the Harbor Bank Employee Stock Ownership
Plan (the "ESOP").
(5) Includes 39,233 shares subject to stock options that will be vested at the
Effective Time and 8,656 shares allocated to Mr. Haun's ESOP account.
(6) Represents shares held by the Jones Family Trust dated 10/6/94, of which
Mr. Jones is a Trustee.
(7) Represents shares held by the D.K. Matteson Trust of which Ms. Matteson is
a Trustee.
(8) Mr. Willingham's address is c/o Boulevard Buick, 2850 Cherry Avenue, Long
Beach, CA 90806.
(9) Represents shares held by the Wilson Family Trust dated 1/15/93 of which
Ms. Wilson is a co-trustee.
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<PAGE>
(10) Represents shares held of record by the ESOP of which Melissa Lanfre, Vice
President and Chief Financial Officer of Harbor, serves as Trustee and over
which Ms. Lanfre has sole investment power. Voting power with respect to
such shares, all of which have been allocated to the accounts of
participants, has been passed through to participants.
(11) Includes 67,137 shares subject to stock options that will be vested as of
the Effective Time and 120,649 shares held by the ESOP as to which members
of the group have voting and/or investment rights.
Each of Harbor's directors has agreed to vote in favor of adoption of the
Merger Agreement. See "CERTAIN RELATED AGREEMENTS--Shareholders' Agreement."
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<PAGE>
THE MERGER
The following information, insofar as it relates to matters contained in the
Merger Agreement, is qualified in its entirety by reference to the Merger
Agreement, which is incorporated herein by reference and attached hereto as
Appendix A. Harbor shareholders are urged to read the Merger Agreement
carefully.
BACKGROUND OF AND REASONS FOR THE MERGER
From the inception of Harbor, the Board of Directors maintained the
philosophy that it was in the best interests of Harbor and its shareholders to
remain independent. The philosophy was tempered, however, by an understanding
that if an offer to purchase Harbor was received that would result in a
perceptibly greater return to shareholders than that expected within a
reasonable period of time through continued independence, that offer should be
given appropriate consideration. In particular, the Board of Directors believed
that, due to the type and sophistication of its customer base, in order to
remain competitive and profitable in the future, Harbor would need to make
extensive technological investments in order to offer its customers certain
services, such as trust and investment services and asset management tools, that
it does not currently offer.
During 1996, Harbor received unsolicited indications of interest from two
separate purchasers which proceeded to the due diligence stage. However, Harbor
was unable to negotiate a price and terms with such buyers which the Board
believed was in the range of acceptable values, and Harbor withdrew from such
discussions.
On January 31, 1997, the Vice Chairman and Chief Executive Officer of City
National, Russell Goldsmith, met with Harbor's Chairman of the Board, James
Gray, and discussed the possibility of a business combination between the two
companies. On January 22 and February 25, 1997, Mr. Gray reported to the Board
of Directors regarding his discussions and the Board of Directors authorized
further discussions with City National. However, no further discussions were
held until June 13, 1997, when George H. Benter, Jr., President of City
National, met with Mr. Gray, Harbor's director, John W. Hancock, and Harbor's
President, Dallas E. Haun, regarding a possible business combination. At City
National's request, Harbor provided City National with publicly available
information about Harbor. Mr. Benter informed City National's senior management
of the results of this meeting and on July 2, 1997, City National's senior
management authorized further discussions with Harbor.
On June 30, 1997, Harbor executed a confidentiality agreement with City
National and due diligence commenced. On July 21, 1997, Messrs. Gray and Haun
met with Mr. Benter, Frank P. Pekny, City National's Chief Financial Officer and
Heng W. Chen, City National's Senior Vice President-Finance/ Controller, to
further discuss a possible transaction, including preliminary negotiations as to
price and terms. Between July 21, 1997 and August 28, 1997, discussions
continued and City National and Harbor conducted due diligence reviews of each
other.
On August 7, 1997 further discussions were held and a preliminary agreement
was reached on a number of issues. From August 14 to August 25, 1997,
representatives of Harbor and City National met and had numerous telephone
conversations to negotiate the final terms of the Merger Agreement, the Stock
Option Agreement and the Shareholder's Agreement. See "CERTAIN
AGREEMENTS--Shareholders' Agreement" and "--Stock Option Agreement" below.
The Harbor Board of Directors met on August 26, 1997 to receive
presentations made by management, financial advisers and legal counsel on the
City National offer. After such presentations, the meeting was recessed for
further consideration of the proposal and further negotiations with City
National as to price. On August 28, 1997, the Board of Directors reconvened. The
Board then unanimously approved the terms of City National's proposal and the
Merger pursuant to the Merger Agreement. The Merger Agreement and the Option
Agreement were executed on August 28, 1997, and the Shareholders' Agreements
were executed shortly thereafter.
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<PAGE>
In evaluating the proposed Merger with City National, the Board of Directors
of Harbor considered a variety of factors, reviewed information relating to City
National and Harbor and received reports and presentations from its officers,
financial advisers and legal counsel. Among the factors considered by the Board
of Directors were the fact that the value of the consideration to be paid in the
Merger represents a premium over the current market price of the Harbor Stock;
the value and form of the consideration to be paid in the Merger compared with
prices paid in acquisitions of other banks and bank holding companies; the book
value and earnings per share of Harbor; the results of operations and prospects
of Harbor and City National, and particularly, the compatibility of the two
institutions' customer bases and the additional services and higher lending
limits that City National could offer Harbor's customers; alternatives to an
acquisition of Harbor, including the advisability of continuing to operate
Harbor as an independent entity; the opinion of Hoefer & Arnett, Inc. confirmed
in a letter to the Board of Directors, that the consideration to be received in
the Merger is fair from a financial point of view to the shareholders of Harbor
(see "Opinion of Financial Advisor to Harbor" below); the tax consequences of
the transaction to the shareholders of Harbor, and the value of City National
Stock as an investment, including the fact that it offers Harbor shareholders
the opportunity to participate as shareholders in the future performance of a
larger, more widely traded financial institution than Harbor. The Harbor Board
concluded, in light of these factors and other factors it considered
appropriate, that the Merger is in the best interests of Harbor and its
shareholders.
RECOMMENDATION OF THE HARBOR BOARD OF DIRECTORS
THE HARBOR BOARD OF DIRECTORS HAS UNANIMOUSLY CONCLUDED THAT THE MERGER IS
IN THE BEST INTERESTS OF HARBOR AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS OF
HARBOR HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT AND THE MERGER.
OPINION OF FINANCIAL ADVISOR TO HARBOR
Harbor has retained Hoefer & Arnett, Inc. ("H&A") to render a written
opinion (the "Fairness Opinion") to the Harbor Board of Directors to the effect
that the Exchange Ratio and the Per Share Cash Consideration (together the
"Purchase Price"), is fair to the holders of Harbor Common Stock from a
financial point of view. No limitations were imposed by the Harbor Board of
Directors upon H&A with respect to the investigations made or procedures
followed in rendering the Fairness Opinion.
THE TEXT OF THE FAIRNESS OPINION OF H&A, DATED AS OF AUGUST 28, 1997 WHICH
SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN BY H&A, IS ATTACHED HERETO AS APPENDIX D. HARBOR SHAREHOLDERS ARE
URGED TO READ THE FAIRNESS OPINION IN ITS ENTIRETY. IN FURNISHING SUCH FAIRNESS
OPINION, H&A DOES NOT ADMIT THAT IT IS AN EXPERT WITH RESPECT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS PART WITHIN
THE MEANING OF THE TERM "EXPERTS" AS USED IN THE SECURITIES ACT (AS DEFINED
BELOW) AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER NOR DOES IT ADMIT
THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION
11 OF THE SECURITIES ACT. THE SUMMARY OF THE PROCEDURES AND ANALYSIS PERFORMED,
AND ASSUMPTIONS USED BY H&A SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF SUCH FAIRNESS OPINION.
H&A'S FAIRNESS OPINION IS DIRECTED TO THE HARBOR BOARD OF DIRECTORS AND IS
DIRECTED ONLY TO THE CONSIDERATION TO BE PAID IN THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HARBOR SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE AT THE HARBOR SPECIAL MEETING. IN ADDITION, ON OCTOBER 13, 1997, H &
A DELIVERED TO THE HARBOR BOARD OF DIRECTORS A WRITTEN CONFIRMATION OF THE
FAIRNESS OPINION.
In arriving at its opinion, H&A has reviewed and analyzed, among other
things, the following: (i) the Agreement; (ii) certain publicly available
financial and other data with respect to City National and Harbor, including
consolidated financial statements for recent years and interim periods to June
30, 1997;
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<PAGE>
(iv) certain other publicly available financial and other information concerning
Harbor and City National and the trading markets for the publicly traded
securities of Harbor and City National; (v) publicly available information
concerning other banks and holding companies, the trading markets for their
securities and the nature and terms of certain other merger transactions H&A
believed relevant to its inquiry; and (vi) evaluations and analyses prepared and
presented to the Board of Directors of Harbor or a committee thereof in
connection with the Merger. H&A has held discussions with senior management of
Harbor and of City National concerning their past and current operations,
financial condition and prospects.
H&A reviewed with the senior management of Harbor earnings projections for
1997 for Harbor as a stand-alone entity, assuming the Merger does not occur. H&A
reviewed City National's 1997 Budget and Strategic Plan, as well as consensus
earnings estimates for 1998 provided by First Call and Standard & Poor's for
City National as a stand-alone entity. Certain financial projections for the
combined companies and for Harbor and City National as stand-alone entities were
derived by H&A based partially upon the projections and information described
above, as well as H&A's own assessment of general economic, market and financial
conditions.
H&A took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking industry
generally. H&A considered such financial and other factors as it deemed
appropriate under the circumstances. H&A's Fairness Opinion was necessarily
based upon conditions as they existed and could only be evaluated on the date
thereof and the information made available to H&A through the date thereof.
In conducting its review and in arriving at the Fairness Opinion, H&A relied
upon and assumed the accuracy and completeness of the financial and other
information provided to it or publicly available and did not attempt
independently to verify the same. H&A relied upon the management of Harbor and
City National as to the reasonableness of the financial and operating forecasts,
projections and projected operating cost savings. H&A also assumed, without
independent verification, that the aggregate allowances for loan losses for
Harbor and City National were adequate to cover such losses. H&A did not make or
obtain any evaluations or appraisals of the property of Harbor or City National,
nor did H&A examine any individual loan credit files. H&A's Fairness Opinion is
limited to the fairness, from a financial point of view, to the shareholders of
Harbor of the consideration to be paid in the Merger which was determined by
arms-length negotiations and does not address Harbor's underlying decision to
proceed with the Merger.
In connection with rendering its Fairness Opinion to the Harbor Board of
Directors, H&A performed certain financial analyses, which are summarized below.
The summary set forth below does not purport to be a complete description of the
presentation by H&A to Harbor's Board or of the analyses performed by H&A. H&A
believes that its analysis must be considered as a whole and that selecting
portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analysis and the processes underlying H&A's Fairness Opinion. The preparation of
a fairness opinion is a complex process involving subjective judgments and is
not necessarily susceptible to partial analysis or summary description. In its
analysis, H&A made numerous assumptions with respect to industry performance,
business and economic conditions, and other matters, many of which are beyond
the control of Harbor and City National. Any estimates contained in H&A's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. Estimates of values
of companies do not purport to be appraisals or necessarily reflect the prices
at which companies or their securities may actually be sold. None of the
financial analyses performed by H&A was assigned a greater significance by H&A
than any other.
Neither Harbor nor City National publicly discloses internal management
financial forecasts and projections of the type provided to H&A in connection
with its review of the proposed Merger. Such forecasts and projections were not
prepared with a view towards public disclosure. The forecasts, projections, and
projected operating cost savings prepared by H&A were based on numerous
variables and
30
<PAGE>
assumptions which are inherently uncertain, including, without limitation,
factors related to general economic and market conditions. Accordingly, actual
results could vary significantly from those set forth in such forecasts and
projections.
Set forth below is a brief summary of the analysis performed by H&A in
reaching the Fairness Opinion. H&A assumed for purposes of its opinion that the
Merger will be accounted for as a purchase transaction under generally accepted
accounting principles. Unless otherwise noted in this analysis, H&A assumed an
allocation of 55% stock and 45% cash combined with an Exchange Ratio of 0.8339
and a Per Share Cash Consideration of $24.10. This resulted in an exchange ratio
adjusted to reflect the allocation between cash and stock (the "Allocated
Exchange Ratio") of 0.4587 City National common shares and a per share cash
consideration adjusted to reflect the allocation between cash and stock (the
"Allocated Per Share Cash Consideration") of $10.85 at time of closing, assuming
a Final City National Stock Price equal to $28.90, the average of the City
National Stock closing price in the twenty day period ended September 12, 1997.
The Exchange Ratio and possible adjustments to the Exchange Ratio were developed
pursuant to extensive negotiations between Harbor and City National. H&A
analyzed certain effects of the Merger assuming Allocated Exchange Ratios, among
others, of 0.4003 and 0.3625. The 0.3625 does not necessarily reflect the lowest
possible Allocated Exchange Ratio under the terms of the Agreement, and there
can be no assurance that the Allocated Exchange Ratio as finally determined in
accordance with the Agreement will not be lower than 0.3625. The analysis also
focuses on core financial and operating projections and statistics which are not
specifically adjusted for nonrecurring charges, unless otherwise stated.
PRO FORMA MERGER AND CONTRIBUTION ANALYSIS. H&A analyzed the changes in the
amount of earnings, book value and indicated dividends attributable to one share
of Harbor Common Stock before the Merger to those attributable to a combination
of cash and City National Stock as a result of the proposed Merger. The
following assumptions regarding earnings and dividends underlie the pro forma
results. The analysis further assumes, unless otherwise stated, Merger-related
operating cost savings to be fully realized during 1998 and assumes the Merger
is completed soon after the fourth quarter of 1997. These projected operating
cost savings represent approximately 30% of Harbor's projected noninterest
expense on a pretax basis. This level of projected operating cost savings,
expressed as a percent of the target institution's projected noninterest
expense, is within a range of the level of operating cost savings, expressed as
a percent of the target institutions' noninterest expense, achieved in previous
transactions reviewed by H&A. H&A performed pro forma merger analyses assuming
the stated earnings projections and the Merger-related projected operating cost
savings. In addition, H&A analyzed certain pro forma merger scenarios in order
to assess the impact on Harbor of some levels of volatility in City National's
and Harbor's projected earnings as well as volatility of the levels of
Merger-related projected operating cost savings. The impact on Harbor of
volatility in City National's earnings was shown by calculating pro forma
results assuming City National's earnings as projected, as well as 75% and 125%
of City National's projected earnings growth rate. In order to measure the
impact on Harbor of volatility of Harbor's earnings to the pro forma results,
H&A also examined the earnings impact on Harbor resulting at those levels of
City National earnings if Harbor achieved 75% and 125% of its projected earnings
growth rate. The impact on Harbor of volatility in the level of Merger-related
projected operating cost savings was shown by calculating pro forma results
assuming cost savings as projected, as well as 50% of the projected cost
savings. H&A analyzed the changes in earnings, book value and cash value for the
years 1998, 1999, and 2000 resulting from various combinations of the
stand-alone and pro forma projected earnings and cost savings volatility
assumptions described above. The analyses showed that for the year 1998 the
change in cash earnings plus pro forma earnings per share ranged from 11.84% to
28.91% and the change in book value plus cash value per share ranged from 25.85%
to 40.15%. For the year 1999 the increase in cash earnings plus pro forma
earnings per share ranged from 6.20% to 32.30% and the change in book value plus
cash value per share ranged from 23.50% to 38.97%. For the year 2000 the change
in cash earnings plus pro forma earnings per share ranged from 1.07% to 36.71%
and the change in book value plus cash value per share ranged from 20.36% to
38.01%.
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<PAGE>
ANALYSIS OF OTHER MERGER TRANSACTIONS. H&A analyzed other California bank
merger and acquisition transactions where the purchase price was over $7.5
million and less than $100 million for the periods January 1, 1996 to September
12, 1997. The transactions analyzed were: Bank of Los Angeles and Culver
National Bank, Santa Barbara Bancorp and Citizens State Bank, Greater Bay
Bancorp and Peninsula Bank of Commerce, BanPonce and Combancorp, Glendale
Federal Bank and One Central Bank, ValliCorp Holdings and Auburn Bancorp,
FirstBanks, Inc. and the Sunrise Bancorp, Dartmouth Capital and Commerce
Security Bancorp, Santa Barbara Bancorp and First Valley Bank, Pacific Capital
Bancorp and South Valley Bancorp, Mid-Peninsula Bancorp and Cupertino National
Bancorp, City National and Riverside National Bank, Home Interstate Bancorp and
CU Bancorp, City National and Ventura County National Bancorp, Monarch Bancorp
and California Commercial Bancorp, Monarch Bancorp and Western Bank, Glendale
Federal Bank and Transworld Bancorp, and Dartmouth Capital and Eldorado Bancorp.
The analysis showed that the Purchase Price represented a multiple of: (i) 2.11x
Harbor's tangible book value compared to a high multiple of 2.35x, a median
multiple of 1.78x and a low multiple of 1.03x for the comparable transactions;
and (ii) 23.0x Harbor's latest twelve months' earnings per share, compared to a
high multiple of 56.16x, a median multiple of 16.55x, and a low multiple of
11.30x for the comparable transactions. H&A noted that no transaction reviewed
was identical to the Merger and that, accordingly any analysis of comparable
transactions necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of the parties
to the transactions being compared.
DISCOUNTED CASH FLOW ANALYSIS. H&A examined the results of a discounted
cash flow analysis designed to compare the present value, under certain
assumptions, that would be attained if Harbor remained independent through 2001
or was acquired in 2001 by a larger financial institution, with the present
value of the combined institutions at the Purchase Price as described in the
Agreement. The results produced in the analysis did not purport to be indicative
of actual values or expected values of Harbor or the shares of Harbor Common
Stock. All cases were analyzed assuming realization of the operating cost
savings, in the amounts and time periods previously indicated, unless otherwise
stated (see Pro Forma Merger and Contribution Analysis).
In calculating the present values through the discounted cash flow analysis,
H&A analyzed the effect of possible earnings volatility and potential
Merger-related operating cost savings volatility, among other items, by assuming
varying levels of projected earnings for Harbor and City National. The three
cases examined were: Harbor earnings as projected and City National earnings as
projected; Harbor earnings using 75% of the Harbor projected earnings growth
rate and City National earnings using 125% of the City National projected
earnings growth rate; and Harbor earnings using 125% of the Harbor projected
earnings growth rate and City National earnings using 75% of the City National
projected earnings growth rate. Pro forma combined cash flows were calculated
assuming the combinations of the cash flows in each of these cases, and were
compared to the cash flows of Harbor on a stand-alone basis as well as to the
cash flows of Harbor acquired in 2001 by a larger financial institution.
The discount rates used ranged from 10.0% to 14.0%. For the Harbor
stand-alone analyses, the terminal price multiples applied to 2001 estimated
earnings per share ranged from 10.00x to 18.00x. The lower levels of the
price-to-earnings per share multiples range reflected an estimated future
trading range of Harbor, while the higher levels of the price-to-earnings per
share multiples were more indicative of a future sale of Harbor's stock to a
larger financial institution. For the pro forma combined analyses, the terminal
price-to-earnings per share multiples also ranged from 10.00x to 18.00x.
For the Harbor stand-alone analyses, the cash flows were comprised of the
projected stand alone dividends per share in years 1997 through 2001 plus the
terminal value of Harbor's Common Stock at year-end 2001 (calculated by applying
each one of the assumed terminal price-to-earnings per share multiples as stated
above to 2001 projected Harbor earnings per share). For the pro forma combined
analyses, the cash flows were comprised of the (i) Per Share Cash Consideration,
(ii) projected pro forma combined dividends per share in years 1997 through 2001
(iii) projected return on the Per Share Cash Consideration
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<PAGE>
in the years 1997 through 2001, and (iv) the terminal value of the pro forma
combined entity's stock at year-end 2001 (calculated by applying each one of the
assumed terminal price-to-earnings per share multiples as stated above to 2001
projected pro forma combined earnings per share). The rate of return assumed
earned on the Per Share Cash Consideration was 6.50%. H&A also calculated the
present values that would be attained in each case if 50% of projected operating
cost savings were realized.
These analyses showed a range of stand-alone present values per share for
Harbor from $14.46 to $17.56, as compared to a range of pro forma combined
present values per share of $22.27 to $26.14. These analyses do not purport to
be indicative of actual values or expected values of the shares of Harbor Stock.
Discounted present value analysis is a widely used valuation methodology which
relies on numerous assumptions, including asset and earnings growth rates,
dividend payout rates, terminal values and discount rates. The analysis showed
that use of a higher (lower) level of projected City National earnings raised
(lowered) the resulting present value for a given level of Harbor earnings, on a
pro forma combined basis. The analysis also showed that use of a lower (higher)
discount rate or a higher (lower) terminal price-to-earnings per share multiple
raised (lowered) the calculated present values.
COMPARABLE COMPANY ANALYSIS. H&A examined recent historical data on Harbor
and City National based upon information from City National's 1996 Annual Report
to Shareholders, subsequent quarterly and other information. H&A analyzed
certain credit and operating statistics for Harbor and City National, comparing
these statistics to data for a peer group of California banks using the publicly
available Hoefer & Arnett Banking Universe, First quarter Statistics (the
"Universe"). The Universe includes 73 independent California banking
institutions. Neither City National nor Harbor is included in the Universe. The
index median statistics are as of or for the quarter ending June 30, 1997,
unless otherwise noted. In this analysis, for comparison purposes, H&A used the
closing stock prices of City National and Harbor for September 12, 1997, prices
which coincide with stock prices and comparative pricing data which appear in
the Universe. The analysis necessarily involved complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies.
<TABLE>
<CAPTION>
CITY
NATIONAL HARBOR INDEX MEDIAN
------------ ---------- -------------
<S> <C> <C> <C>
Total Assets (000's)................................................. $4,710,444 $ 212,853 $ 211,869
Market Capitalization (000's)(1)..................................... $1,331,510 $ 32,550 $ 35,497
Price to Tangible equity per share(1)................................ 3.25x 2.00x 1.88x
Price to Latest Twelve Months Earnings............................... 18.65x 22.03x 14.18x
Tangible equity to tangible assets................................... 8.82% 7.66% 8.73%
Nonperforming assets to total assets(2).............................. 1.08% 1.77% 0.85%
Loan loss reserve to nonperforming loans............................. 325.8% 88.13% 142.47%
Return on average assets (annualized)................................ 1.67% 0.77% 1.28%
Return on average equity (annualized)................................ 16.87% 9.91% 13.99%
Efficiency Ratio(3).................................................. 57.66% 73.10% 66.33%
</TABLE>
- ------------------------
(1) Statistics calculated based on bid prices at September 12, 1997, the latest
available prices prior to publishing the second quarter 1997 Universe.
(2) Nonperforming assets include loans which are 90 days past due and still
accruing in addition to nonaccrual and restructured loans and other real
estate owned.
(3) Efficiency ratio represents noninterest expense as a percent of total
revenues.
H&A is an investment banking firm continually engaged in the valuation of
business and securities, including financial institutions and their securities,
in connection with mergers and acquisitions, negotiated underwritings,
competitive, private offerings of securities, secondary distributions of listed
and unlisted securities and valuations for estate, corporate and other purposes.
H&A is a market maker in the common shares of Harbor. H&A has not previously
provided investment banking services to Harbor or City National.
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<PAGE>
FINANCIAL ADVISORY FEES. In consideration for the preparation and rendering
of the Fairness Opinion, Harbor shall pay H&A a fee to be paid at closing equal
to $100,000. Harbor will also reimburse H&A for all reasonable out-of-pocket
expenses which may be incurred in connection with the rendering of the Fairness
Opinion. No portion of the fee is contingent upon the conclusions reached in the
Fairness Opinion.
EFFECT OF THE MERGER
THE MERGER. At the Effective Time, Harbor will merge with and into City
National. City National will be the surviving corporation. At the Effective
Time, the City National Certificate and the City National By-laws as in effect
immediately prior thereto will be the Certificate of Incorporation and By-laws
of the surviving corporation. In addition, the directors of City National
immediately prior to the Effective Time will continue as the directors of the
surviving corporation.
THE BANK MERGER. After the Effective Time, City National shall cause Harbor
Bank to merge with and into City National Bank (the "Bank Merger").
CONSIDERATION PAYABLE UPON CONSUMMATION OF THE MERGER
CONVERSION OF HARBOR STOCK. The shares of Harbor Stock issued and
outstanding immediately prior to the Effective Time (other than Dissenting
Shares and Cancelled Shares) will be converted into the right to receive City
National Stock based on the Exchange Ratio (defined below), the right to receive
cash in the amount of $24.10 per share of Harbor Stock, or a combination of City
National Stock and cash. In the aggregate, no less than 48%, and no more than
55%, of the total consideration paid to holders of Harbor Stock may be in the
form of City National Stock. Holders of Harbor Stock will have the opportunity
to indicate their preference for receiving all cash, all City National Stock or
a different proportion of cash and City National Stock. Such elections will be
honored to the extent possible so long as in the aggregate no less than 48%, and
no more than 55%, of Harbor shares will be exchanged for City National Stock.
The maximum number of shares of City National Stock issuable under the 55% limit
will be reduced by the number of substitute options for City National Stock
granted to employees of Harbor in exchange for their Harbor stock options. See
"--Stock Options."
Each such share of Harbor Stock will, by virtue of the Merger, be converted
into the right to receive either:
(1) a fraction of a share of City National Stock equal to the quotient
(such quotient, the "Exchange Ratio") of (A) $24.10, divided by (B) the
average of the daily closing prices of a share of City National Stock on the
NYSE for the twenty consecutive trading days ending on the third trading day
immediately prior to the Effective Time (such average, the "Final City
National Stock Price"); provided, however, in the event (a) the Final City
National Stock Price is more than $31.9125 but less than or equal to
$34.6875, the Exchange Ratio will be 0.7552, (b) the Final City National
Stock Price is less than $23.5875, the Exchange Ratio shall be 1.0217, or
(c) the Final City National Stock Price is greater than $34.6875, the
Exchange Ratio shall be 26.20 divided by the Final City National Stock
Price;
(2) cash in the amount of $24.10; or
(3) a combination of City National Stock (at the rate of the Exchange
Ratio for a whole share of Harbor Stock) and cash (at the rate of $24.10 for
a whole share of Harbor Stock).
At the Effective Time, shares of Harbor Stock ("Cancelled Shares") that may
be owned by Harbor (or any of its wholly owned subsidiaries) as treasury stock
or owned by City National (or any of its wholly owned subsidiaries) other than,
in each case, shares held in a fiduciary capacity or in satisfaction of a debt
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<PAGE>
previously contracted, shall be cancelled, retired and shall cease to exist, and
no exchange or payment shall be made with respect to such Cancelled Shares.
ELECTION AND PRORATION PROCEDURE. A form of transmittal letter ("Letter of
Transmittal") will be mailed at least thirty-five days prior to the anticipated
Effective Time or on such other date as Harbor and City National mutually agree
("Mailing Date") to each holder of record of Harbor Stock as of five business
days prior to the Mailing Date. Each Letter of Transmittal will permit the
holder to elect (an "Election") to receive either (1) City National Stock with
respect to all of such holder's Harbor Stock (a "Stock Election"), or (2) cash
with respect to all of such holder's Harbor Stock (a "Cash Election"), or (3) a
combination of shares of City National Stock and cash in the proportions
specified on the Letter of Transmittal (a "Combination Election").
Any Harbor Stock (other than Dissenting Shares) with respect to which the
exchange agent designated by City National and acceptable to Harbor (the
"Exchange Agent") does not receive an effective, properly completed Letter of
Transmittal prior to the Election Deadline (as hereinafter defined) will be
deemed to be "Undesignated Shares."
An Election will be properly made and effective only if the Exchange Agent
actually receives a properly completed Letter of Transmittal by 5:00 P.M. on or
before the later of the thirtieth day after the Letter of Transmittal is first
mailed and the thirty-first day after any required notice under Chapter 13 of
the California Code is mailed (the "Election Deadline"). A Letter of Transmittal
will be deemed properly completed only if an Election is indicated for each
share of Harbor Stock covered by such Letter of Transmittal and if accompanied
by one or more certificates (or customary affidavits and indemnity regarding the
loss or destruction of such certificates or the guaranteed delivery of such
certificates, each as set forth in the Letter of Transmittal) representing all
shares of Harbor Stock covered by such Letter of Transmittal, together with duly
executed transmittal materials included in or required by the Letter of
Transmittal.
An Election may be revoked or changed at any time prior to the Election
Deadline. In the event an Election is revoked prior to the Election Deadline,
the related shares of Harbor Stock will automatically become Undesignated Shares
unless and until a new Election is properly made with respect to such shares on
or before the Election Deadline.
In the event that the aggregate number of shares of Harbor Stock as to which
Stock Elections and Combination Elections for Harbor Stock have effectively been
made is less than 48% of the aggregate Merger consideration, then the Exchange
Agent will select by lot such number of holders of Undesignated Shares to
receive City National Stock as will be necessary so that the number of shares
for which a Stock Election and Combination Election for City National Stock has
been made or is deemed to have been made with respect to such Undesignated
Shares will have an aggregate value equal to 48% of the total Merger
consideration. In the event that all Undesignated Shares plus all shares as to
which Stock Elections and Combination Elections for Harbor Stock have been made
have an aggregate value less than 48% of the total Merger consideration, then
each holder of Harbor Stock who made an effective Cash Election or Combination
Election for cash will be subject to an additional proration process which will
result in the holder receiving a different proration than originally requested,
one which will result in a final prorated amount of cash and a prorated number
of shares of City National Stock with a value equal to at least 48% of the total
Merger consideration.
Correspondingly, in the event that the aggregate number of shares of Harbor
Stock as to which Stock Elections and Combination Elections for Harbor Stock
have been effectively made exceeds 55% of the aggregate Merger consideration,
then (1) all Undesignated Shares and Dissenting Shares will be deemed to have
made Cash Elections and (2) each holder of Harbor Stock who made an effective
Stock Election or Combination Election for City National Stock will be entitled
to a prorated number of shares of City National Stock and a prorated amount of
cash such that approximately 55% of the total Merger consideration is paid in
the form of shares of City National Stock.
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HOLDERS OF HARBOR STOCK ARE UNLIKELY TO RECEIVE THE PRECISE PROPORTION OF
CITY NATIONAL STOCK AND/OR CASH INDICATED BY SUCH HOLDER'S ELECTION.
For a more complete discussion of the foregoing proration procedure see
Section 2.3 of the Merger Agreement attached to this Prospectus/Proxy Statement
as Appendix A.
For a discussion of the rights of dissenting shareholders of Harbor, see
"DISSENTERS' RIGHTS."
NO FRACTIONAL SHARES. Notwithstanding the foregoing, each holder of shares
of Harbor Stock exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of City National Stock (after taking
into account all certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of City National Stock multiplied by the Final City National Stock Price.
No holder will be entitled to dividends, voting rights or any other rights as a
stockholder in respect of any fractional share of City National Stock.
EFFECTIVE TIME
The Effective Time of the Merger will be the date the certificate of merger
is filed in accordance with Sections 251 and 252 of the Delaware General
Corporation Law (the "Delaware Code"). On or about the Effective Time, (1) an
executed counterpart of such certificate of merger or (2) a copy of the Merger
Agreement, with an officer's certificate conforming to Section 1103 of the
California Code of each of City National and Harbor, and in either case, a tax
clearance certificate from the California Franchise Tax Board with respect to
Harbor, will be filed with the Secretary of State of the State of California.
If all conditions to the Merger, including receipt of all regulatory
approvals and the shareholder approval being sought at the Special Meeting, are
satisfied or waived prior to January 9, 1998, the Effective Time is currently
expected to occur on January 9, 1998, and not, in any event, during 1997.
SURRENDER OF HARBOR STOCK CERTIFICATES
As soon as practicable following the Effective Time, and after the proration
procedures described above are completed, each holder of Harbor Stock who
submits (or submitted) a properly completed Letter of Transmittal will be issued
a certificate or certificates representing the number of shares of City National
Stock to which such holder is entitled, if any (and, if applicable, a check for
the amount to be paid in lieu of fractional shares of City National Stock),
and/or an amount of cash to which such holder is entitled, if any. Holders of
Harbor Stock who did not submit a Letter of Transmittal prior to the Election
Deadline must nevertheless submit a properly completed Letter of Transmittal
(other than the section pertaining to the Election) and the certificate or
certificates representing Harbor Stock to the Exchange Agent in order to receive
the Merger consideration payable in respect of such shares.
After the Effective Time, there will be no transfers on Harbor's stock
transfer books of shares of Harbor Stock issued and outstanding immediately
prior to the Effective Time. If certificates representing shares of Harbor Stock
are presented for transfer after the Effective Time, together with documents
sufficient to evidence and effect such transfer, they will be cancelled and
exchanged for the shares of City National Stock and/or cash deliverable in
respect thereof.
No dividend or other distribution declared or made with respect to City
National Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered certificate of Harbor Stock until the holder duly
surrenders such certificate. Following the surrender of any such certificate,
there will be paid to the holder, without interest, (1) the amount of any cash
payable with respect to a fractional share of City National Stock to which such
holder is entitled and the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such whole
shares of City National Stock and (2) at the appropriate payment date, the
amount of dividends or other
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distributions with (A) a record date after the Effective Time but prior to
surrender and (B) a payment date subsequent to surrender payable with respect to
such shares of City National Stock.
None of City National, Harbor, the Exchange Agent or any other person will
be liable to any former holder of Harbor Stock for any shares of City National
Stock (or dividends or distributions with respect thereto) or cash delivered to
a public official pursuant to applicable unclaimed property, abandoned property,
escheat or similar laws.
If a certificate for Harbor Stock has been lost, stolen or destroyed, the
Exchange Agent will issue the consideration properly payable in accordance with
the Merger Agreement upon receipt of appropriate evidence as to such loss, theft
or destruction, appropriate evidence as to the ownership of such certificate by
the claimant, and appropriate and customary indemnification.
Any shares as to which dissenters' rights have been perfected will be
purchased in accordance with the procedures described under "DISSENTERS' RIGHTS"
and in Appendix B to this Proxy Statement/ Prospectus.
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of City
National and Harbor to effect the Merger are subject to the satisfaction or
waiver by both parties prior to the Effective Time of certain conditions,
including the following:
(1) Receipt of the approval of the shareholders of Harbor solicited hereby;
(2) Receipt of the required approvals, consents or waivers of governmental
authorities (all such approvals and the expiration of all applicable waiting
periods being the "Regulatory Approvals") and no such approval, consent or
waiver shall include any condition or requirement that would, in the good faith
determination of City National, be materially burdensome on City National in the
context of the transactions contemplated by the Merger Agreement;
(3) The absence of any order, injunction or decree that enjoins or prohibits
the consummation of the Merger, the Bank Merger or any other transaction
contemplated by the Merger Agreement;
(4) No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced which prohibits, materially
restricts or makes illegal consummation of the Merger, the Bank Merger or any
other transactions contemplated by the Merger Agreement;
(5) No stop order suspending the effectiveness under the Securities Act of
the Registration Statement of which this Proxy Statement/Prospectus is a part
shall have been issued and no proceedings for that purpose shall have been
initiated; and
(6) The shares of City National Stock to be issued in the Merger shall be
approved for listing on the NYSE, subject to notice of issuance.
For a discussion of the regulatory approvals required for consummation of
the Merger, see "THE MERGER--Regulatory Approvals."
CITY NATIONAL CONDITIONS. The obligation of City National to effect the
Merger is subject to the satisfaction or waiver by City National prior to the
Effective Time of certain additional conditions, including the following:
(1) The truth of each of the representations and warranties of Harbor
contained in the Merger Agreement, in all material respects, at the Effective
Time as if made on such date; the receipt by City National of an updated and
current disclosure schedule; the performance by Harbor, in all material
respects, of its covenants and agreements contained in the Merger Agreement; and
the receipt by City National of an officers' certificate of Harbor to the
foregoing effect;
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(2) The absence of any litigation or proceeding brought against Harbor by
any governmental agency seeking to prevent the transactions under the Merger
Agreement;
(3) Receipt by City National of the opinion of Manatt, Phelps & Phillips,
LLP, special counsel to Harbor, as to certain legal matters;
(4) Receipt by City National of the final calculation of Harbor's fees and
expenses incurred in connection with the Merger, the payment by Harbor of such
fees and expenses, and the release of City National from liability for such fees
or expenses;
(5) At the close of business on the last day of the month preceding the
Effective Time, the "Adjusted Book Value" (as defined in Section 7.2(e) of the
Merger Agreement) of Harbor shall have been not less than $17,200,000, plus or
minus the product of (a) $150,000 times (b) the number of full months in the
period subsequent or prior to, respectively, December 31, 1997 and the month-end
prior to the Effective Time;
(6) At the close of business on the last day of the month preceding the
Effective Time, total deposits of Harbor Bank shall have been not less than 90%
of the average of total deposits for Harbor Bank for the six month period ending
on the last day of the same month in the preceding year;
(7) Between August 28, 1997 and the Effective Time, there shall not have
occurred any event related to the business condition (financial or otherwise),
prospects, operations or properties of Harbor and its subsidiaries which would
have a material adverse effect on the business, financial condition, or results
of operations of Harbor;
(8) Receipt by City National and its directors and officers who sign the
Registration Statement of letters of Harbor's independent certified public
accountants relating to the Registration Statement, dated as of (a) the date of
the mailing of this Proxy Statement/Prospectus to Harbor's shareholders, and (b)
shortly prior to the Effective Time, with respect to certain financial
information regarding Harbor in the form customarily issued by such accountants
at such time in transactions of this type;
(9) Receipt by City National of Shareholders Agreements executed by each
director of Harbor; and
(10) Each of James H. Gray and Dallas E. Haun shall have agreed to employment
arrangements with City National.
As of the date of this Proxy Statement, the condition in paragraph (8) above
has been waived by City National and the conditions in paragraphs (9) and (10)
have been satisfied.
HARBOR CONDITIONS. The obligation of Harbor to effect the Merger is subject
to the satisfaction or waiver by Harbor prior to the Effective Time of certain
additional conditions, including the following:
(1) The truth of each of the representations and warranties of City National
contained in the Merger Agreement, in all material respects, at the Effective
Time as if made on such date; the performance by City National, in all material
respects, of its covenants and agreements contained in the Merger Agreement; and
the receipt by Harbor of an officer's certificate of City National to the
foregoing effect;
(2) The absence of any litigation or proceeding brought by any governmental
agency against City National seeking to prevent the consummation of the
transactions contemplated by the Merger Agreement;
(3) Receipt by Harbor of an opinion from Richard H. Sheehan, Jr., General
Counsel of City National, as to certain legal matters;
(4) Receipt by Harbor of a confirmation of the opinion received from Munger
Tolles as to the qualification of the Merger as a tax-deferred reorganization
within the meaning of Section 368(a) of the Code; and
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(5) There shall not have occurred any event related to the business
condition (financial or otherwise), prospects, operations or properties of City
National and its subsidiaries that has a material adverse effect on City
National.
REGULATORY APPROVALS
THE MERGER. Receipt of the Regulatory Approvals is a condition to each
party's obligations to effect the Merger. See "Conditions to Consummation of the
Merger" above, and "Amendment and Termination" below. There can be no assurance
that such Regulatory Approvals will be obtained, and, if obtained, that the
Regulatory Approvals will not contain a condition or requirement which causes
such approvals to fail to satisfy the conditions set forth in the Merger
Agreement. The Regulatory Approvals are described below.
The Merger is subject to prior approval by the Federal Reserve Board under
the Bank Holding Company Act of 1956, as amended (the "BHCA"), which requires
that the Federal Reserve Board take into consideration, among other factors, the
financial and managerial resources and future prospects of the institutions and
the convenience and needs of the communities to be served. The BHCA prohibits
the Federal Reserve Board from approving the Merger (1) if it would result in a
monopoly or be in furtherance of any combination or conspiracy to monopolize the
business of banking in any part of the United States, or (2) if its effect in
any section of the country may be substantially to lessen competition or tend to
create a monopoly, or if it would in any other manner be a restraint of trade,
unless the Federal Reserve Board finds that the anticompetitive effects of the
Merger are clearly outweighed by the public interest and the probable effect of
the transaction in meeting the convenience and needs of the communities to be
served. The Federal Reserve Board has the authority to deny any application if
it concludes that the combined organization would have an inadequate capital
position or if the acquiring organization does not meet the requirements of the
Community Reinvestment Act. Under the BHCA, the Merger may not be consummated
until the 15th day following the date of the Federal Reserve Board approval,
during which time the United States Department of Justice may challenge the
Merger on antitrust grounds. If, however, the Department of Justice does not
commence a legal action during such 15-day period, it may not thereafter
challenge the transaction except in an action commenced under the antimonopoly
provisions of Section 2 of the Sherman Antitrust Act. The commencement of the
antitrust action would stay the effectiveness of the Federal Reserve Board's
approval unless a court specifically orders otherwise.
An application has been submitted seeking the foregoing approval of the
Federal Reserve Board. The BHCA provides for the publication of notice and the
opportunity for administrative hearings relating to an application for approval
under the BHCA and authorizes the Federal Reserve Board to permit interested
parties to intervene in the proceedings. If an interested party is permitted to
intervene, such intervention could substantially delay the regulatory approval
required for consummation of the Merger.
City National and Harbor are not aware of any material governmental
approvals or actions that are required for consummation of the Merger, except as
described above. Should any such approval or action be required, it is presently
contemplated that such approval or action would be sought.
THE BANK MERGER. The Bank Merger is subject to the prior approval of the
Office of the Comptroller of the Currency (the "OCC"). The Bank Merger Act
prohibits the OCC from approving the Bank Merger (1) if it would result in a
monopoly or be in furtherance of any combination or conspiracy to monopolize or
to attempt to monopolize the business of banking in any part of the United
States, or (2) if its effect in any section of the country may be substantially
to lessen competition or tend to create a monopoly, or if it would in any other
manner be a restraint of trade, unless the OCC finds that the anticompetitive
effects of the Bank Merger are clearly outweighed by the public interest and the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served. Under the Bank Merger Act and applicable regulations,
a Bank Merger may not be consummated until the 15th day following the date of
receipt of OCC approval, during which time the United States Department of
Justice may challenge a Bank Merger on antitrust grounds. In addition, the Bank
Merger Act requires that the OCC take into
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consideration, among other factors, the financial and managerial resources and
future prospects of the institutions and the convenience and needs of the
communities to be served. The OCC has the authority to deny an application if it
concludes that the combined organization would have an inadequate capital
position or if the requirements of the Community Reinvestment Act are not
satisfied.
An application for the requisite approval of the Bank Merger by the OCC has
been submitted. No assurances can be given, however, that such approval will be
received or that the Bank Merger will be consummated.
CONDUCT OF BUSINESS PENDING THE MERGER
HARBOR. The Merger Agreement contains certain restrictions on the conduct
of Harbor's business pending consummation of the Merger.
In particular, prior to the Effective Time, the Merger Agreement requires
each of Harbor and Harbor Bank to (1) conduct business in the usual, regular and
ordinary course, consistent with past practice; (2) use commercially reasonable
efforts to maintain and preserve intact its business organization, employees and
advantageous business relationships, and to continue to develop such customer
relationships and to retain the services of its key employees; (3) maintain
properties; (4) use commercially reasonable efforts to maintain insurance
coverage; (5) perform, in all material respects, its obligations under material
contracts, leases and documents relating to or affecting its assets, properties
and business except as it may in good faith reasonably dispute; (6) charge off
all loans, receivables and other assets, or portions thereof, deemed
uncollectible in accordance with GAAP, regulatory accounting principles ("RAP"),
applicable law or regulations, or classified as "loss" or as directed by its
regulators; (7) substantially comply with all federal and state laws and rules,
regulations or orders; and (8) take no action which would reasonably be expected
to affect adversely or delay the parties' ability to obtain any Regulatory
Approvals, or other approvals required for the Merger or to perform its
covenants or agreements under the Merger Agreement on a timely basis.
Without the prior written consent of City National, Harbor and Harbor Bank
may not take certain specified actions, including, but not limited to, the
following: (1) borrow money or guaranty the obligations of any other person
(except for ordinary course banking transactions or certain short-term
borrowings); (2) enter into transactions or make adjustments involving its stock
(other than upon the exercise of options outstanding under the Option Plan or
the payment to the option holder of the spread between $24.10 and the exercise
price of any such option); or declare or pay dividends; (3) transfer or encumber
assets with a book value of $250,000 or more; (4) sell OREO or similarly held
properties for less than 80% of book value; (5) make material investments or
acquisitions; (6) enter into, renew, amend or terminate any material contract
(other than deposit and loan agreements or in the ordinary course of business
with respect to certain specified contracts); (7) alter its method of
establishing interest rates for deposits; (8) increase compensation or benefits
of directors, employees, former employees or retirees; agree to or amend any
pension, retirement, retention, "golden parachute" or other severance (other
than in accordance with the Merger Agreement), deferred compensation, profit
sharing or welfare benefit plan or agreement or employment agreement, other than
annual salary and bonus increases made in the ordinary course of business not
exceeding 2% in the aggregate or 6% for any employee; or voluntarily accelerate
the vesting of any employee benefits, except for the acceleration of the vesting
of options granted pursuant to the Option Plan; (9) settle claims involving
material monetary damages (except to the extent fully reserved against on its
books and records) or under terms containing material obligations; (10) sell
securities and certain SBA loans or purchase securities other than U. S.
treasury or agency securities maturing within three years; (11)vamend its
charter documents; (12) change or introduce new services, products, or campaigns
or open or close any branch or facility; (13) renew, extend or materially alter
any loan or forbearance agreement for a period of greater than six months, or
make any loan or forbearance agreement, which would result in total obligations
outstanding exceeding specified levels; and (14) reallocate or reduce any
material accrual or reserve.
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CITY NATIONAL. City National has agreed not to (1) take any action which
would reasonably be expected to delay or adversely affect the ability of City
National, Harbor or Harbor Bank to obtain any necessary approvals, consents or
waivers of any governmental authority required for the transactions contemplated
by the Merger Agreement or to perform its covenants or agreements on a timely
basis under the Merger Agreement; (2) amend the City National Certificate in any
respect that materially and adversely affects the rights and privileges
attendant to the City National Stock; or (3) agree to, or make any commitment
to, do any of the foregoing.
NO SOLICITATION
Harbor has agreed in the Merger Agreement that it will not authorize or
permit any of its officers, directors, employees or agents to directly or
indirectly solicit, initiate or encourage any inquiries relating to, or the
making of any proposal which constitutes a "Takeover Proposal" (as defined
below), or recommend or endorse any Takeover Proposal, or participate in any
discussions or negotiations, or provide third parties with any nonpublic
information, relating to any such inquiry or proposal or otherwise facilitate
any effort or attempt to make or implement a Takeover Proposal, except if
Harbor's Board of Directors, after having consulted with and considered the
advice of counsel, has reasonably determined in good faith that the failure to
do so would cause the members of its Board of Directors to breach their
fiduciary duties under applicable laws. Harbor has agreed to cease and cause to
be terminated any activities, discussions or negotiations conducted prior to the
date of the Merger Agreement with any parties other than City National with
respect to any of the foregoing. Harbor has also agreed to advise immediately
City National following the receipt by it of any Takeover Proposal and the
details thereof, and advise City National of any developments with respect to
such Takeover Proposal immediately upon the occurrence thereof.
"Takeover Proposal" means, with respect to any person, any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving Harbor or any of its subsidiaries or any proposal or offer
to acquire in any manner a substantial equity interest in, or a substantial
portion of the assets of, Harbor or any of its subsidiaries other than the
transactions contemplated or permitted by the Merger Agreement.
AMENDMENT AND TERMINATION
AMENDMENT. Subject to compliance with applicable law, prior to the
Effective Time, the Merger Agreement may be amended or modified by the parties
thereto, except that, after the vote by the shareholders of Harbor, any
amendment which reduces the amount or changes the form of the consideration to
be delivered to the Harbor shareholders in the Merger will not be valid without
approval of the shareholders of Harbor.
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Time, either before or after its approval by the shareholders of
Harbor,
(1) By mutual agreement;
(2) By either party in the event of an uncured material breach by the other
party of any representation, warranty, covenant or agreement contained in the
Merger Agreement;
(3) By either party if any Regulatory Approval has been denied or any
governmental authority or court shall have issued a final, non-appealable order
enjoining or otherwise prohibiting consummation of the Merger;
(4) By either party in the event that the Merger is not consummated by March
31, 1998;
(5) By either party if the required vote of the shareholders of Harbor
approving the Merger Agreement is not obtained at a duly held meeting of
shareholders or any adjournment thereof;
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(6) By City National if the Board of Directors of Harbor shall have
withdrawn, modified or changed in a manner adverse to City National its approval
or recommendation of the Merger Agreement and the Merger;
(7) By either party if, at the intended Closing of the Merger, any of the
conditions to such party's obligations shall not have been met or waived by such
party;
(8) By City National, if (A) Harbor shall have provided information to or
participated in discussions with a third party relating to a Takeover Proposal,
or facilitated or recommended a Takeover Proposal and shall have continued
discussions with any third party concerning such Takeover Proposal for more than
15 business days after the date of receipt of such Takeover Proposal; or (B) a
Takeover Proposal that is publicly disclosed shall have been commenced, publicly
proposed or communicated to Harbor which contains a proposal as to price
(without regard to the specificity of such price proposal) and Harbor shall not
have rejected such proposal within 15 business days of its receipt or the date
its existence first becomes publicly disclosed, if earlier;
(9) By Harbor if a Takeover Proposal exists and the Board of Directors of
Harbor, after having consulted with and considered the advice of outside legal
counsel, reasonably determine in good faith that such action is necessary in the
exercise of its fiduciary duties under applicable law; or
(10) By Harbor, if the Final City National Stock Price is less than $17.00.
As discussed above, if the Final City National Stock Price is less than
$17.00, the Harbor Board of Directors may, in its discretion, terminate the
Merger Agreement. On October 10, 1997, the closing price for the City National
Stock was $31.1875. In making any such determination, the Harbor Board of
Directors anticipates that it would review current information relating to City
National and Harbor, receive presentations from its officers, financial advisor
and legal counsel and consider a variety of factors including those which it
considered in making its initial decision to enter into the Merger Agreement.
See "THE MERGER--Background of and Reasons for the Merger." If the Merger
Agreement is approved by a majority of the outstanding shares of Harbor Stock,
the Board of Directors of Harbor will have the power and authority, without the
necessity of a further vote of the Harbor shareholders, to determine whether or
not to proceed with the Merger as provided in the Merger Agreement. Therefore,
the Board of Directors may determine not to exercise its right to terminate the
Merger Agreement if the Final City National Stock Price is less than $17.00.
BANK MERGER
Following the Bank Merger, the articles of association and by-laws of City
National Bank as in effect immediately prior thereto will be the articles of
association and by-laws of the surviving corporation. In addition, the directors
of City National Bank immediately prior to the Bank Merger will be the directors
of the surviving corporation. The Bank Merger is subject to certain regulatory
approvals. See "Regulatory Approvals," above.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of October 10, 1997, the directors and executive officers of Harbor
(including the executive officers of Harbor Bank) beneficially owned 402,741
shares of Harbor Stock (not including shares such persons may acquire through
the exercise of vested stock options and shares held of record by the ESOP and
as to which voting rights have been passed through to participants) which will
be converted into the right to receive cash or City National Stock or both at
the Effective Time in the same manner as will the shares of Harbor Stock held by
all other Harbor shareholders. In addition, directors and executive officers of
Harbor (including the executive officers of Harbor Bank) held as of such date
options to purchase 67,137 shares of Harbor Stock, which will be canceled in
exchange for certain cash payments or substitute options for City National
Stock. See "Stock Options." Immediately after the Effective Time, former
directors and executive officers of Harbor as a group will own less than 1% of
the outstanding shares of City National Stock.
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Harbor Bank's Board of Directors in 1995 approved an Employment Agreement
for Mr. Haun, President and Chief Operating Officer of Harbor Bank, that has
been extended through February 28, 2000. Under his Agreement, Mr. Haun's term of
employment shall be extended until three years after the sale of a majority
interest in Harbor Bank.
In addition, Harbor Bank's Board of Directors in 1995 approved the terms of
an Employment Agreement with Mr. Phillip J. Bond, Executive Vice President and
Chief Credit Officer of Harbor Bank, which provides, among other things, that
upon a change in the majority ownership of Harbor within 24 months of
employment, Mr. Bond would be entitled to $50,000 in extra compensation.
It is a condition to City National's obligation to close that each of
Messrs. Gray and Haun shall have agreed to an employment arrangement with City
National. City National and Messrs. Gray and Haun have agreed to mutually
satisfactory terms for each such employment arrangement.
Harbor and Harbor Bank have entered into indemnification agreements with
each of the directors and executive officers of Harbor and Harbor Bank. The
agreements provide that Harbor and Harbor Bank will indemnify the indemnitee
against expenses, judgments, fines, settlements and other pending amounts
actually and reasonably incurred by the indemnitee in connection with any
threatened or pending proceeding including any proceeding brought by or in the
right of Harbor or Harbor Bank, by reason of the fact that the indemnitee is or
was a director or officer of such company. The agreements further provide that
expenses incurred by the indemnitee will be paid by Harbor or Harbor Bank in
advance, subject to the indemnitee's obligation to reimburse the company in the
event it is ultimately determined that the indemnitee is not entitled to
indemnification under the provisions of the agreement. The Merger Agreement
provides that all rights to indemnification now existing in favor of the
directors and officers of Harbor and Harbor Bank as provided in their respective
articles of incorporation, bylaws and indemnification agreements in effect as of
the date of the Merger Agreement will survive the Merger and shall continue in
full force and effect. City National further agreed that following the
consummation of the Merger, to the greatest extent permitted by Delaware law and
the organizational documents or Bylaws of City National it would indemnify,
defend and hold harmless individuals who were directors and officers of Harbor
or Harbor Bank for any claim or loss arising out of their actions while a
director or officer, and shall pay the expenses, including attorneys fees, of
such individual in advance of the final resolution of any claim, provided such
individual shall first execute an undertaking acceptable to City National to
return such advances in the event it is finally concluded such indemnification
is not allowed under applicable law.
EFFECT ON HARBOR EMPLOYEE BENEFIT PLANS
All employees of Harbor or its subsidiaries who become employees of City
National shall be entitled to participate in stock plans, bonus plans and all
other benefit plans of City National on the same basis as other similarly
situated City National employees. Each such Harbor employee will be credited for
eligibility, participation, vesting and accrual purposes with such employee's
respective years of service with Harbor or a subsidiary (or other prior service
credited by Harbor) as though they had been City National employees, provided,
however, that no more than 1,080 hours of sick leave may be carried over into
City National's sick leave program. See also "Interests of Certain Persons in
the Transaction."
EMPLOYEE STOCK OWNERSHIP PLAN. Harbor Bank adopted the Harbor Bank Employee
Stock Ownership Plan (the "ESOP") originally effective as of January 1, 1980 and
amended and restated the plan effective January 1, 1987. The ESOP was amended
effective January 1, 1989 to comply with the requirements of the Tax Reform Act
of 1986 and later regulations and subsequently amended to incorporate the annual
compensation limit.
The purpose of the ESOP is to provide employees with supplemental income
upon retirement. All full-time employees of Harbor Bank and its subsidiaries,
upon the later to occur of the completion of one year of service or the
attainment of age 21, are eligible to participate in the ESOP. Directors of
Harbor Bank and its subsidiary, union employees and employees who are
non-resident aliens earning no U.S.
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source income are not eligible to participate. The ESOP is funded in its
entirety by contributions from Harbor Bank and its subsidiaries. It is intended
that the trust created by the ESOP (the "Trust") will invest the ESOP
contributions primarily in shares of Harbor Stock. All Trust assets are held for
the exclusive benefit of participants in the ESOP. Contributions by Harbor Bank
and its subsidiaries are at the discretion of their respective Boards of
Directors. Melissa Lanfre, Harbor's Senior Vice President and Chief Financial
Officer, acts as Trustee of the Trust.
Employer contributions to the ESOP are allocated among participating
employees in proportion to their compensation for the plan year. Participating
employees become vested in contributions made by Harbor and its subsidiaries
under the ESOP 20% after two years of service, 20% for each additional year of
service, with 100% vesting after six years of service. The Internal Revenue
Service most recently determined that the ESOP is a "qualified plan" and that
the Trust is exempt from income taxation under the Code on March 21, 1997.
As of October 10, 1997, the ESOP held 120,649 shares of Harbor Stock, all of
which had been allocated to participating employees.
Each participant in the ESOP may instruct Harbor Bank, as Plan Administrator
(the "Plan Administrator"), as to the manner in which the shares of Harbor Stock
allocated to his or her account will be voted at the Meeting. The Plan
Administrator will be bound by any such instructions. Unallocated shares held by
the Trustee shall be voted by the Trustee in accordance with instructions from
the Plan Administrator. All allocated shares for which no voting instructions
are received by the Plan Administrator will not be voted by the Trustee.
If the Merger is approved, the participants will be given the opportunity to
indicate their preference to receive in the Merger cash, City National Stock, or
a combination of the two in exchange for the shares held by the ESOP which have
been allocated to their accounts. See "Election Procedure," below.
If the Merger is approved, it is anticipated that Harbor will terminate the
ESOP effective as of the Effective Time. If the ESOP is terminated, all
participants will become 100% vested in their benefits under the ESOP,
regardless of their length of employment with Harbor Bank or its subsidiaries,
and will receive a distribution upon approval of the qualified status of the
terminated ESOP by the Internal Revenue Service.
401(K) PLAN. Harbor Bank adopted the 401(k) Profit Sharing Plan (the
"401(k) Plan") on November 15, 1986. The 401(k) Plan was established to provide
participants with retirement benefits. All employees of Harbor Bank who have
completed six months of service and attained the age of 18 years are eligible to
participate in the 401(k) Plan. Nonemployee directors of Harbor Bank and its
subsidiary, union employees and employees who are nonresident aliens earning no
U.S. source income are not eligible to participate.
Participants in the 401(k) Plan may elect to defer a percentage of their
pre-tax compensation (subject to certain legal limitations), which may be
matched by discretionary contributions from Harbor Bank and its subsidiaries.
Employer contributions to the 401(k) Plan are allocated among participating
employees in proportion to their compensation for the plan year. Participating
employees are always 100% vested in all contributions made on their behalf under
the 401(k) Plan. Upon a participant's retirement at age 65, death, disability or
other termination of employment, the participant will receive his or her
benefits in the form of a single life annuity (for an unmarried participant) or
a qualified joint and survivor annuity (if the participant is married) at the
time of the distribution triggering event. A participant may also make an in
service withdrawal of his or her total account balance upon the attainment of
age 59 1/2. The Internal Revenue Service has determined that the 401(k) Plan is
a "qualified plan" and that the 401(k) Plan Trust is exempt from income taxation
under the Code.
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If the Merger is approved, it is anticipated that Harbor will terminate the
401(k) Plan effective as of a date prior to the consummation of the Merger. If
the 401(k) Plan is terminated, all participants will receive a distribution upon
approval of the qualified status of the terminated 401(k) Plan by the Internal
Revenue Service.
STOCK OPTIONS
Harbor currently maintains the Harbor Bancorp 1990 Stock Option Plan (the
"Option Plan"). As of October 10, 1997, options were outstanding under the
Option Plan to acquire 68,353 shares of Harbor Stock at an average exercise
price of $7.59 per share, and of such amount, directors and executive officers
as a group hold options to acquire in the aggregate 67,137 shares of Harbor
Stock, at an average exercise price of $7.60 per share.
At least 30 days prior to the anticipated Effective Time, City National will
notify each employee of Harbor who owns options pursuant to the Option Plan
whether such employee will be offered employment with City National or City
National Bank following the Effective Time. Upon the Effective Time, the Option
Plan and all outstanding options shall automatically terminate, unless exchanged
for options to acquire City National Stock as described below. Prior to the
Effective Time, Harbor will offer to cancel each option held by an employee who
will not be offered employment in exchange for an amount in cash (subject to
applicable withholding tax) equal to the difference between $24.10 and the
optionee's exercise price per share, multiplied by the number of shares subject
to the option, including options which would not, but for the Merger, have then
been vested. Employees who are offered employment with City National or City
National Bank may choose to either (a) have their options cancelled and receive
cash as described in the prior sentence or (b) exchange their options for Harbor
stock under the Option Plan for a similar option for City National Stock under
City National's stock option plan.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain of the material U.S. federal
income tax consequences of the Merger to a shareholder of Harbor who holds
Harbor shares as a capital asset (a "Holder"). The discussion is based on laws,
regulations, rulings and decisions in effect on the date hereof, all of which
are subject to change, possibly with retroactive effect, and to differing
interpretation. This discussion is for general information only, and does not
address all aspects of federal income taxation that may be applicable to a
Holder subject to special treatment under the Code (including, but not limited
to, banks, tax-exempt organizations, insurance companies, dealers in securities
or foreign currency and holders who are not U.S. persons (as defined in Section
7701(a)(30) of the Code) or who acquired shares of Harbor Common Stock pursuant
to the exercise of an employee stock option or otherwise as compensation). In
addition, the discussion does not address the state, local or foreign tax
consequences of the Merger.
Neither Harbor nor City National has requested a ruling from the Service
with respect to any of the matters discussed in this summary. Due to the
Service's so-called "comfort rulings" policy concerning corporate
reorganizations, it is unlikely that the Service would be willing to issue a
ruling regarding the Merger.
It is a condition to the obligations of Harbor to consummate the Merger that
Harbor receive an opinion from Munger, Tolles & Olson LLP ("Munger Tolles")
concluding that the Merger will qualify as a tax-deferred reorganization within
the meaning of Section 368(a) of the Code. Harbor has received such an opinion
from Munger Tolles, subject to confirmation at the Effective Time. The
discussion herein is based on the assumption that the Merger does in fact
qualify as a tax-deferred reorganization within the meaning of Section 368(a) of
the Code.
The opinion of Munger Tolles is based on certain assumptions regarding the
factual circumstances that will exist at the Effective Time of the Merger and on
certain representations made by Harbor, 5% shareholders of Harbor, and City
National with respect to the Merger, including representations regarding
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actions of City National and certain Harbor shareholders following the Merger.
If any of these factual assumptions or representations is inaccurate, the Merger
may not qualify as a tax-deferred reorganization within the meaning of Section
368(a) of the Code and, as a result, the tax consequences of the Merger could
differ from those discussed in this summary.
The treatment of the Merger as a tax-deferred reorganization will depend
upon, among other things, whether the shareholders of Harbor maintain a
sufficient continuity of stock ownership interest in City National after the
Merger. The Service took the position for purposes of issuing advance rulings
under Section 368(a)(1)(A) of the Code that the shareholders of the acquired
corporation (i.e., Harbor) must maintain a continuing equity ownership interest
in the acquiring corporation (i.e., City National) equal to at least 50% of the
value of their equity ownership interest in the acquired corporation. The case
law standard is less stringent than the Service's announced advance rulings
standard. The Service's advance rulings standard is not a legal test. Munger
Tolles's opinion relies on the continuity standard under the decided cases
rather than the Service's advance rulings standard. Although the Merger may not
satisfy the advance rulings standard, it is anticipated that the Merger will
satisfy the case law continuity requirement. Nonetheless, it is possible that
sales, exchanges or other dispositions of City National Stock undertaken by the
Harbor shareholders could disqualify the Merger as a tax-deferred reorganization
within the meaning of Section 368(a) of the Code. In that case, the Merger would
constitute a fully taxable transaction for Harbor and its shareholders. As a
result of the Merger, City National would inherit Harbor's tax liability (if
any) resulting from the Merger.
If, in accordance with the opinion of Munger Tolles, the Merger is treated
as a reorganization within the meaning of Section 368(a) of the Code, the
following is a summary of the general federal income tax consequences of the
Merger to a Holder.
The federal income tax consequences of the Merger to a Holder generally will
depend on whether the Holder exchanges Harbor Stock for cash, City National
Stock, or a combination thereof, and may further depend on whether (i) the
Holder is deemed to own constructively shares of Harbor Stock and (ii) the
Holder actually or constructively owns any shares of City National Stock. For
this purpose, shares are constructively owned under rules set forth in Section
318 of the Code which generally deem a person to own stock owned by certain
family members or related entities or that is the subject of an option or
options owned or deemed owned by such person.
EXCHANGE SOLELY FOR CASH. If pursuant to the Merger a Holder exchanges all
of the shares of Harbor Stock actually owned by the Holder solely for cash
(including pursuant to the exercise of its right to dissent and seek an
appraisal), such Holder will recognize gain or loss equal to the difference
between the amount of cash received and the Holder's adjusted tax basis in the
shares of Harbor Stock surrendered therefor, which gain or loss generally will
be long-term capital gain or loss if the Holder's holding period with respect to
the stock is more than one year, and otherwise will be short-term capital gain
or loss. The 1997 Taxpayer Relief Act establishes preferential long-term capital
gains rates ("Preferential Rates") that will apply to Holders whose holding
period with respect to the stock is more than 18 months. If, however, any such
Holder constructively owns shares of Harbor Stock that are exchanged for shares
of City National Stock in the merger or owns shares of City National Stock
actually or constructively after the Merger, the consequences to such Holder may
be similar to the consequences described below under the heading "Exchange for
City National Stock and Cash," except that the amount of consideration, if any,
treated as a dividend may not be limited to the amount of such Holder's gain.
Because the tax treatment applicable to a Holder described in the immediately
preceding sentence is not free from doubt, a Holder in that situation is urged
to consult his or her own tax advisor regarding the tax consequences to such
Holder.
EXCHANGE SOLELY FOR CITY NATIONAL STOCK. If pursuant to the Merger a Holder
exchanges all of the shares of Harbor Stock actually owned by the Holder solely
for shares of City National Stock, such Holder will not recognize any gain or
loss except in respect of cash received in lieu of a fractional share of City
National Stock (as discussed below). The aggregate adjusted tax basis of the
shares of City National Stock
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received (including fractional shares) in that exchange will be equal to the
aggregate adjusted basis of the shares of Harbor Stock surrendered therefor, and
the holding period of such City National Stock will include the period during
which such shares of Harbor Stock were held. If the Holder has differing bases
or holding periods in respect of its shares of Harbor, the Holder should consult
its tax advisor prior to the exchange with regard to identifying the bases or
holding periods of the particular shares of City National Stock that it receives
in the exchange.
EXCHANGE FOR CITY NATIONAL STOCK AND CASH. If pursuant to the Merger a
Holder exchanges all of the shares of Harbor Stock actually owned by the Holder
for a combination of City National Stock and cash, such Holder will realize gain
or loss equal to the difference between (i) the sum of cash and the fair market
value of City National Stock received and (ii) the Holder's adjusted tax basis
in the shares of Harbor Stock surrendered therefor. However, any such loss will
not be recognized, and any such gain will only be recognized to the extent of
the cash received. For this purpose, gain or loss must be calculated separately
for each identifiable block of shares surrendered in the exchange, and a loss
realized on one block of shares of Harbor Stock cannot be used to offset a gain
recognized on another block of shares of Harbor Stock. Any such recognized gain
will generally be long-term capital gain if the Holder's holding period with
respect to the stock is more than one year, and otherwise will be short-term
capital gain. The Preferential Rates will apply to any such recognized gain if
the Holder's holding period with respect to the stock is more than 18 months.
If, however, the cash received has the effect of the distribution of a dividend,
the gain will be treated as a dividend to the extent of the Holder's ratable
share of Harbor's accumulated earnings and profits (and, possibly, City
National's accumulated earnings and profits). The term "accumulated earnings and
profits" in the preceding sentence may include current earnings and profits.
The aggregate tax basis of City National Stock received by a Holder that
exchanges the Holder's shares of Harbor Stock for a combination of City National
Stock and cash pursuant to the Merger will be equal to the aggregate adjusted
tax basis of the shares of Harbor Stock surrendered therefor, decreased by the
cash received and increased by any recognized gain (whether capital gain or
ordinary income). The holding period of such City National Stock will include
the holding period of the shares of Harbor Stock surrendered therefor. If a
Holder has differing bases or holding periods in respect of the Holder's shares
of Harbor Stock, the Holder should consult his or her tax advisor prior to the
exchange to identify the particular shares of Harbor Stock to be surrendered in
the exchange and the particular bases or holding periods of the particular
shares of City National Stock that it receives in the exchange.
POSSIBLE TREATMENT OF CASH AS A DIVIDEND. In general, the determination of
whether the gain recognized in the exchange will be treated as capital gain or
dividend income depends upon whether and to what extent the exchange reduces the
Holder's deemed percentage stock ownership interest in City National Stock. For
purpose of this determination, the Holder is treated as if he or she first
exchanged all of the Holder's shares of Harbor Stock solely for City National
Stock and then City National immediately redeemed (the "deemed redemption") a
portion of such City National Stock in exchange for the cash that the Holder
actually received. The gain recognized in the exchange followed by a deemed
redemption will be treated as capital gain if the deemed redemption is (i)
"substantially disproportionate" with respect to the Holder, (ii) "not
essentially equivalent to a dividend," or (iii) a "complete termination" of the
Holder's interest in all shares of City National Stock actually and
constructively owned by that Holder.
The deemed redemption, generally, will be "substantially disproportionate"
with respect to a Holder if the percentage described in (ii) below is less than
80 percent of the percentage described in (i) below. Whether the deemed
redemption is "not essentially equivalent to a dividend" with respect to a
Holder will depend upon the Holder's particular circumstances. At a minimum,
however, in order for the deemed redemption to be "not essentially equivalent to
a dividend," the deemed redemption must result in a "meaningful reduction" in
the Holder's deemed percentage ownership of City National Stock. In general,
that determination requires a comparison of (i) the percentage of outstanding
City National Stock that the Holder is deemed actually and constructively to
have owned immediately before the deemed redemption and (ii) the percentage of
outstanding City National Stock that is actually and constructively owned by the
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Holder immediately after the deemed redemption. In applying the foregoing tests,
a shareholder is deemed to own stock owned and, in some cases, constructively
owned by certain family members, certain estates and trusts of which the Holder
is a beneficiary, certain affiliated entities, and stock subject to an option
actually or constructively owned by the shareholder or such other persons. As
these rules are complex, each Holder that may be subject to these rules should
consult its tax advisor. The Internal Revenue Service has ruled that a
relatively minor reduction in the percentage stock ownership of a minority
stockholder in a publicly held corporation whose relative stock interest is
minimal and who exercises no control with respect to corporate affairs is a
"meaningful reduction." Accordingly, in most circumstances, gain recognized by a
Holder that exchanges the Holder's shares of Harbor Stock for a combination of
City National Stock and cash generally will be long-term capital gain if the
Holder's holding period with respect to the stock is more than one year, will be
subject to the Preferential Rates if the Holder's holding period with respect to
the stock is more than 18 months, and otherwise will be short-term capital gain.
It is not clear what constitutes a "minimal" stock interest for this purpose,
nor how much reduction in relative equity interest is required. Because of the
uncertainty in this area, shareholders are strongly urged to consult their own
tax advisors as to whether their receipt of cash qualifies for capital gain
treatment under this test.
The receipt of cash by a shareholder of Harbor will be a "complete
termination of interest" only if the shareholder receives cash for all of the
shares of Harbor Stock actually and constructively owned by that shareholder at
the time of the Merger. For these purposes, the constructive ownership rules
will apply as described above. However, Section 302(c)(2) of the Code provides
that, for the purpose of determining whether there is a "complete termination of
interest," the family member constructive ownership rules will not apply if
certain conditions are met. If those conditions are met, a Harbor shareholder
will not be deemed to own shares of City National Stock owned or deemed to be
owned by family members for the purpose of determining whether there is a
complete termination of that shareholder's interest.
The Agreement and Plan of Merger permits Harbor shareholders to make certain
elections regarding their preferred mix of cash and City National Stock to be
received in the Merger. In planning which election to make, shareholders of
Harbor should take into account the rules described above. The factors
determining whether a particular shareholder will obtain sale or exchange
treatment (as opposed to dividend treatment) with respect to any cash received
must be analyzed on a shareholder-by-shareholder basis. In addition, the
relative benefits of receiving sale or exchange treatment (as opposed to
dividend treatment) with respect to any cash received must be determined and
weighed on a shareholder-by-shareholder basis. In planning for such an election,
each shareholder should consult with his or her own tax advisor.
CASH RECEIVED IN LIEU OF A FRACTIONAL SHARE. Cash received in lieu of a
fractional share of City National Stock will be treated as received in
redemption of such fractional share and gain or loss will be recognized by a
Holder, equal to the difference between the amount of cash received and the
portion of the basis of the share of Harbor Stock allocable to such fractional
interest. Such gain or loss generally will be capital gain or loss, will be
long-term capital gain or loss if the holding period for such share of Harbor
Stock was greater than one year as of the date of the exchange and will be
subject to the Preferred Rates if the holding period for such share of Harbor
Stock was greater than 18 months as of the date of the exchange.
OTHER CONSIDERATIONS APPLICABLE TO SHAREHOLDERS OF HARBOR. Shareholders of
Harbor will be required to provide their social security numbers or their
taxpayer identification numbers or, in some circumstances, certain other
information to the Exchange Agent and to certify that such information is
correct in order to avoid the "backup withholding" requirements that might
otherwise apply under the Code. If a shareholder of Harbor does not provide his
or her social security number, taxpayer identification number or other required
information and certify that such information is correct, City National will be
required to withhold 31 percent of any cash payments to which such shareholder
is entitled pursuant to the Merger Agreement unless an exemption applies under
the applicable law and regulations. Any amount paid as
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backup withholding will be credited against the Holder's federal income tax
liability. Shareholders of Harbor who receive City National Stock must also
comply with the information reporting requirements of the Treasury regulations
under Section 368 of the Code.
SHARES ISSUED IN CONNECTION WITH STOCK OPTIONS OR THE PERFORMANCE OF
SERVICES. The preceding discussion of federal income tax consequences may not
be applicable to a shareholder of Harbor who acquires shares of Harbor Stock:
(1) pursuant to the exercise of any incentive stock option that was granted less
than two years prior to the date of the Merger; (2) pursuant to the exercise of
an incentive stock option that was exercised less than one year prior to the
date of Merger; or (3) in connection with the performance of services where the
shares of Harbor Stock continue to be subject to a "substantial risk of
forfeiture" (or are substantially non-vested), as of the date of the Merger.
Such a shareholder of Harbor may be treated as having received compensation
(taxable as ordinary income) as a result of the Merger. Accordingly, any such
shareholder should consult his or her own tax advisor with respect to the
federal income tax consequences of the Merger.
The foregoing discussion of the expected federal income tax consequences of
the Merger is based on current authorities. There is no assurance that
legislative or administrative changes or court decisions may not be forthcoming
that would significantly change these expected consequences. Any such changes
may or may not be retroactive with respect to transactions prior to the date of
those changes.
THE SUMMARY FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY. IT DOES NOT CONSTITUTE TAX ADVICE OR AN OPINION OF
MUNGER TOLLES. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER APPLICABLE TO HIM OR HER, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for by City National under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," as amended. Under this method of accounting, the
purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values prior to the Effective Time of the Merger.
Income of the combined company will not include income (or loss) of Harbor prior
to the Closing.
EXPENSES
The Merger Agreement provides that each party will pay its own expenses in
connection with the Merger Agreement, except that the costs and expenses of
printing and mailing the Proxy Statement/ Prospectus will be borne by City
National, unless the Merger does not occur, in which event such costs and
expenses will be borne equally by City National and Harbor. All filing and other
fees paid to the SEC in connection with the Merger will be borne by City
National. None of Harbor's expenses in connection with the Merger Agreement will
be deducted from the consideration payable to Harbor shareholders upon
consummation of the Merger, nor will Harbor's reasonable expenses for attorneys,
accountants, investment bankers, and other advisors and agents for services
rendered solely in connection with the transactions contemplated by the Merger
Agreement be considered in computing Harbor's Adjusted Book Value, as defined in
Section 7.2(e) of the Merger Agreement.
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CERTAIN RELATED AGREEMENTS
SHAREHOLDERS' AGREEMENT
In connection with the Merger Agreement, certain officers and the directors
of Harbor, together holding an aggregate of 402,741 shares of Harbor Stock (or
approximately 28.46% of the shares of Harbor Stock outstanding on October 10,
1997), have each entered into a Shareholders' Agreement with City National dated
as of August 28, 1997 (the "Shareholders' Agreement"). Pursuant to the
Shareholders' Agreement, each such person has agreed to vote or cause to be
voted all shares of Harbor Stock owned or acquired by him or her, in favor of
the Merger and the Merger Agreement and the other matters contemplated by the
Merger Agreement. In addition, each such person has agreed to vote or cause to
be voted all of the shares of Harbor Stock against the following actions (other
than the Merger and the transactions contemplated by the Merger Agreement): (A)
any extraordinary corporate transactions, such as a merger, consolidation or
other business combination involving Harbor or its subsidiaries; (B) any sale,
lease or transfer of a material amount of the assets of Harbor or its
subsidiaries; (C) any change in the majority of the board of Harbor; (D) any
material change in the present capitalization of Harbor; (E) any amendment of
the Harbor Articles; (F) any other material change in Harbor's corporate
structure or business; or (G) any other action which is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone, discourage
or materially adversely affect the contemplated economic benefits to City
National of the Merger or the transactions contemplated by the Merger Agreement
or the Stock Option Agreement. Each such person has also agreed not to enter
into any agreement or understanding with any person or entity to vote or give
instructions after the date that the Shareholders Agreement terminates in any
manner inconsistent with such person's obligation to vote in accordance with the
above-referenced guidelines.
Each such person also has agreed not to (1) sell, transfer, assign or
otherwise dispose of any of his or her shares of Harbor Stock without the prior
written consent of City National, other than shares of Harbor Stock sold or
surrendered to pay the exercise price of any stock options or to pay taxes or
satisfy Harbor's withholding obligations with respect to any taxes resulting
from such exercise or (2) pledge, mortgage or encumber such shares of Harbor
Stock.
In addition, each such person also has agreed (1) that he or she will not
directly or indirectly solicit any inquiries or proposals from any person
relating to any proposal or transaction for the disposition of the business or
assets of Harbor or any of its subsidiaries, or the acquisition of voting
securities of Harbor or any subsidiary of Harbor or any business combination
between Harbor and any person other than City National and (2) to use his or her
best efforts to maintain such person's (including his or her affiliates')
banking relationship with Harbor Bank after the Merger and after the occurrence
of the Bank Merger, with City National Bank, for a period of at least three
years in a manner consistent with past practice.
STOCK OPTION AGREEMENT
GENERAL. Concurrently with the execution and delivery of the Merger
Agreement, and as a condition and inducement thereto, City National and Harbor
entered into the Stock Option Agreement, pursuant to which Harbor granted City
National an option to purchase up to 282,901 shares of Harbor Stock (or such
other number of shares of Harbor Stock as would, when issued, represent 19.9% of
the then outstanding Harbor Stock) at a price per share of $18.00. The
consummation of a purchase or a repurchase (as described below) pursuant to the
Stock Option Agreement may be subject to, among other things, obtaining any
required regulatory approvals.
The following is a summary of certain provisions of the Stock Option
Agreement which is attached hereto as Appendix C to this Proxy
Statement/Prospectus and is incorporated herein by reference. The following
summary is qualified in its entirety by reference to the Stock Option Agreement.
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EXERCISE OF THE OPTION. The option is exercisable only upon the occurrence
of certain specified events (each an "Exercise Event") inconsistent with the
consummation of the Merger pursuant to the Merger Agreement. These include, but
are not limited to:
(1) a merger or consolidation of Harbor or its subsidiaries or a
disposition of 50% or more of their consolidated assets;
(2) the issuance, sale or disposition of securities representing 20% or
more of the voting power of Harbor or its subsidiaries;
(3) the acquisition by any person or group other than City National of
beneficial ownership of, or the right to acquire beneficial ownership of,
20% or more of the outstanding shares of Harbor Stock;
(4) the public announcement by Harbor of its intent to authorize,
recommend or endorse, or the entering into by Harbor of an agreement to
effect, any of the above-listed transactions; or
(5) the termination by Harbor of the Merger Agreement if an alternative
Takeover Proposal (as defined in the Merger Agreement) exists and the Harbor
Board has reasonably determined in good faith in the exercise of their
fiduciary duties, and upon consultation with and advice of independent legal
counsel, that such termination is necessary.
If the Merger Agreement is terminated in a manner that does not immediately
render the option exercisable, the option may thereafter become exercisable upon
the occurrence of an Exercise Event, provided the option has not expired.
EXPIRATION. The right to exercise the option expires under various
circumstances, including, but not limited to (1) consummation of the Merger, (2)
termination of the Merger Agreement by mutual consent, (3) termination of the
Merger Agreement by Harbor if the Final City National Stock Price is less than
$17.00, or (4) provided an Exercise Event or certain preliminary acquisition
events have not occurred, termination of the Merger Agreement due to a material
breach thereof, the failure to obtain Regulatory Approval or shareholder
approval or the failure to consummate the Merger by March 31, 1998, or
termination by City National due to a withdrawal of the endorsement of the
Merger Agreement by the Harbor Board. The option also expires eighteen months
following the date it first becomes exercisable or following any termination of
the Merger Agreement other than pursuant to the provisions summarized in the
previous sentence.
LIMITATION ON SPREAD VALUE. City National may not realize Spread Value (as
described below) in excess of $1,980,000 upon the exercise of the option. In the
event the Spread Value exceeds $1,980,000 the number of shares of Harbor Stock
which City National is entitled to purchase will be reduced to the extent
required such that the Spread Value following such reduction is equal to or less
than $1,980,000.
"Spread Value" is precisely defined in the Stock Option Agreement, but is
intended to approximate the excess of the market value of Harbor Stock (based on
trading prices of Harbor Stock just prior to the date of exercise) over the
option exercise price of $18.00 per share of Harbor Stock.
ADJUSTMENT OF NUMBER OF SHARES. The number and type of securities subject
to the options and the purchase price of the shares of Harbor Stock are subject
to adjustment upon any change in the Harbor Stock by reason of dividend, stock
split, recapitalization, combination, exchange of shares or other similar
transactions or events such that City National will receive (upon exercise of
the option) the same number and class of securities as if the option had been
exercised immediately prior to the occurrence of such transaction or event. The
number of shares of Harbor Stock subject to the option will also be adjusted in
the event Harbor issues additional shares of Harbor Stock, such that the number
of shares of Harbor Stock subject to the option represents 19.9% of Harbor's
Stock then outstanding.
SUBSTITUTE OPTION. In the event of certain mergers or consolidations
involving Harbor or its subsidiaries or the sale or transfer of substantially
all of Harbor's assets, City National has the right to cause the
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option to convert into or be exchanged for a substitute option. This substitute
option would be subject to exercise by City National and repurchase by the
issuer at the request of City National, at prices, and subject to conditions,
specified in the Stock Option Agreement.
REPURCHASE AT THE OPTION OF CITY NATIONAL. During the 12 month period
following specified "Repurchase Events," City National has the right to require
Harbor to repurchase the option and, to the extent permitted by the California
Code, all shares of Harbor Stock purchased by City National pursuant to a
previous exercise of the option. A "Repurchase Event" under the Stock Option
Agreement includes: (i) the acquisition by any person or group of beneficial
ownership, or the right to acquire beneficial ownership, of 50% or more of the
then-outstanding shares of Harbor Stock, (ii) the consummation of a transaction
causing a substitute option to be issued, or (iii) following an Exercise Event,
the receipt by City National of notice that regulatory approval required for the
exercise of the option and purchase of the option shares will not be issued or
granted.
Any repurchase will be at a price specified in the Stock Option Agreement as
the "Repurchase Consideration." Generally, the Repurchase Consideration equals
the sum of (1) the option price paid by City National upon exercises of the
option and (2) the excess of the Applicable Price over $18.00, multiplied by the
number of shares of Harbor Stock with respect to which the option has not been
exercised or with respect to which the option has been exercised but City
National still has beneficial ownership of the shares of Harbor Stock,
multiplied by the number of all of such shares. The portion of the Repurchase
Consideration in excess of the exercise price paid by City National is limited
to $1,980,000.
Under the Stock Option Agreement, the "Applicable Price" generally refers to
the highest price per share of Harbor Stock (1) paid by another party in certain
Repurchase Events, (2) received by Harbor shareholders in any transaction which
caused a substitute option to be issued, or (3) in the market during a specified
period prior to City National's exercise of its repurchase right. In the event
of a sale of less than all of Harbor's assets, "Applicable Price" is defined
with respect to market value of Harbor's remaining assets.
REGISTRATION RIGHTS. City National has certain rights to require
registration of any shares of Harbor Stock purchased pursuant to the Stock
Option Agreement under the securities laws if necessary to enable City National
to sell such shares.
EFFECT OF STOCK OPTION AGREEMENT. The Stock Option Agreement is intended to
increase the likelihood that the Merger will be consummated on the terms set
forth in the Merger Agreement. Consequently, certain aspects of the Stock Option
Agreement may have the effect of discouraging persons who might now or prior to
the Effective Time be interested in acquiring all of or a significant interest
in Harbor from considering or proposing such an acquisition, even if such
persons were prepared to offer higher consideration per share for Harbor Stock
than the consideration set forth in the Merger Agreement.
RESALE OF CITY NATIONAL STOCK
The shares of City National Stock issued pursuant to the Merger Agreement
will be freely transferable under the Securities Act except for shares issued to
any shareholder who may be deemed to be an "affiliate" of Harbor for purposes of
Rule 145 under the Securities Act as of the date of the Special Meeting.
Affiliates may not sell their shares of City National Stock acquired in
connection with the Merger except pursuant to an effective registration
statement under the Securities Act covering such shares or in compliance with
Rule 145 under the Securities Act or another applicable exemption from the
registration requirements of the Securities Act. Persons who may be deemed to be
affiliates of Harbor generally include individuals or entities that control, are
controlled by or are under common control with Harbor and may include certain
officers and directors of Harbor as well as principal shareholders of Harbor.
Certain persons who Harbor believes to be affiliates of Harbor have entered
into an agreement providing that such persons will not sell, assign, transfer or
otherwise dispose of, or offer to sell, transfer or
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otherwise dispose of the City National Stock to be received by such persons in
the Merger except (1) in compliance with the applicable provisions of the
Securities Act and the rules and regulations thereunder or (2) in a transaction
that, in the opinion of independent counsel reasonably satisfactory to City
National, is exempt from registration under the Securities Act.
DESCRIPTION OF CAPITAL STOCK
The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the Delaware Code and the City National
Certificate of Incorporation. For a fuller discussion of certain rights
associated with the City National Stock, see "Comparison of Rights of Holders of
City National Stock and Harbor Stock."
COMMON STOCK
City National has 75,000,000 authorized shares of Common Stock, of which
approximately 45,969,139 were issued and outstanding as of September 30, 1997
and an additional 7,424,435 shares were subject to stock options. City National
Stock is traded on the NYSE under the symbol "CYN."
The holders of City National Stock are entitled to one vote per share on all
matters requiring stockholder action. The City National Certificate does not
permit cumulative voting for directors. The holders of City National Stock have
no preemptive or other subscription rights and there are no redemption, sinking
fund or conversion privileges applicable thereto. The holders of City National
Stock are entitled to receive dividends as and when declared by the board of
directors out of funds legally available therefor, subject to any restrictions
by its regulators. Upon liquidation, dissolution or winding up of City National,
holders of City National Stock are entitled to share ratably in all assets
remaining after payment of liabilities. All outstanding share of City National
Stock are fully paid and nonassessable.
The registrar and transfer agent for City National Stock is Continental
Stock Transfer & Trust Company.
PREFERRED STOCK
City National has 5,000,000 authorized shares of preferred stock, of which
none were issued and outstanding as of September 30, 1997. City National's
Certificate of Incorporation provides that the terms, rights and preferences of
any preferred stock issued in the future, including dividend rates, conversion
prices, voting rights, redemption prices, maturity dates, liquidation preference
and similar matters, are to be determined by City National's Board of Directors
at the time such issuance is approved. Management does not presently know
whether any shares of preferred stock will actually be issued or, if issued,
what the terms, rights and preferences thereof will be. Under Delaware law,
however, the holders of such preferred stock will not have any preemptive rights
with respect to the future issuance of shares of common or preferred stock,
unless City National's Certificate of Incorporation is amended to provide for
such rights. Depending on the terms, rights and preferences thereof, the
issuance of any shares of preferred stock may have the effect of diluting the
percentage of stock ownership and voting rights of other shareholders of City
National.
RIGHTS AGREEMENT
On February 26, 1997, the Board of Directors of City National adopted a
Rights Agreement (the "Rights Agreement"), under which preferred stock purchase
rights (the "Rights") were distributed as a Rights dividend on March 13, 1997 at
the rate of one Right for each share of City National Stock held as of the close
of business on that date. Until the Distribution Date (as defined below), (1)
the Rights are not exercisable, (2) the Rights are attached to and trade only
together with the City National Stock and (3) the stock certificates
representing City National Stock also represent the Rights attached to the City
National
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Stock. Each share of City National Stock issued after March 13, 1997 and prior
to the Distribution Date shall incorporate the terms of the Rights Agreement and
include one Right.
The "Distribution Date" is the earliest of (1) the tenth business day
following the date of the first public announcement that any person (with
certain exceptions) has become the beneficial owner of 10% or more of the then
outstanding shares of City National Stock (such person is a "10% Stockholder"
and the date of such public announcement is the "10% Ownership Date"), (2) the
tenth business day (or such later day designated by the City National Board of
Directors) following the date of commencement of, or the announcement of an
intention to make, a tender offer or exchange offer, the consummation of which
would cause any person to become a 10% Stockholder or (3) the first date, on or
after the 10% Ownership Date, upon which City National is acquired by merger or
other business combination in which City National is not the surviving entity.
Upon the close of business on the Distribution Date, the Rights shall
separate from the City National Stock, Rights certificates shall be issued, and
the Rights shall become exercisable as described below.
Unless the Rights have expired or been redeemed or exchanged, each Right may
be exercised, at the option of the holders, to purchase one of the following:
(1) one-hundredth of one share of Series A Junior Participating Cumulative
Preferred Stock of City National, at an exercise price of $90.00 per share,
which will have rights similar to one share of City National Stock, (2) from and
after the close of business on the tenth business day following the 10%
Ownership Date, shares of City National Stock with a market value equal to twice
the exercise price (initially $90), or (3) if, on or after the 10% Ownership
Date, (a) City National is sold to or merged with another person or entity and
is not the surviving corporation or all or part of the City National Stock is
exchanged for the stock or assets of another person or entity or (b) 50% or more
of City National's assets or earning power are sold, shares of common stock of
the surviving corporation or purchaser with an aggregate market value equal to
twice the exercise price (initially $90). From and after the first event of the
type described in clauses (2) and (3) of this paragraph, each Right that is
beneficially owned by a 10% Stockholder shall be void.
The Rights shall expire on March 13, 2007, unless earlier redeemed or
exchanged, unless the Distribution Date has previously occurred and the Rights
have separated from the City National Stock, in which case the Rights will
remain outstanding for ten years.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 ("Section 203") of the Delaware Code prevents a Delaware
corporation from engaging in a "Business Combination" (defined to include a
variety of transactions, including mergers, as set forth below) with an
"Interested Stockholder" (generally defined as a person with 15% or more of a
corporation's outstanding voting stock) for three years following the date such
person became an Interested Stockholder unless: (1) before such person became an
Interested Stockholder, the board of directors of the corporation approved
either the Business Combination or the transaction in which the Interested
Stockholder became an Interested Stockholder; (2) upon consummation of the
transaction which resulted in the Interested Stockholder becoming an Interested
Stockholder, the Interested Stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers and employee stock ownership plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (3) following the date on which such person became an Interested
Stockholder, the Business Combination is (x) approved by the board of directors
of the corporation and (y) authorized at a meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock of the
corporation not owned by the Interest Stockholder.
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Under Section 203, the restrictions described above apply to City National
unless, among other things, (1) by the affirmative vote of a majority of shares
entitled to vote, it adopts an amendment to its certificate of incorporation or
bylaws expressly electing not to be governed by Section 203 (such an amendment
would not be effective until 12 months after its adoption and would not apply to
any Business Combination between City National and any person who became an
Interested Stockholder on or prior to such adoption); or (2) no class of City
National's voting stock is (x) listed on a national securities exchange, (y)
authorized for quotation on an inter-dealer quotation system of a registered
national securities association or (z) held of record by more than 2,000
stockholders (unless any of the foregoing results from action taken, directly or
indirectly, by an Interested Stockholder or from a transaction in which a person
becomes an Interested Stockholder).
A Business Combination is defined in Section 203 as (1) a merger or
consolidation; (2) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of the aggregate market value of either all assets of the corporation
determined on a consolidated basis or all the outstanding stock of a
corporation; (3) any transaction which results in the issuance or transfer by
the corporation, or by certain subsidiaries thereof, of any of its stock to the
Interested Stockholder, except pursuant to (x) the exercise, exchange or
conversion of securities exercisable for, exchangeable for or convertible into
stock of the corporation of any subsidiary which were outstanding prior to the
time the stockholder became an Interested Stockholder or (y) a transaction which
effects a pro rata distribution to all stockholders of the corporation; (4) any
transaction involving the corporation or certain subsidiaries thereof which has
the effect of increasing the proportionate share of the stock of any class or
series, or securities convertible into the stock of any class or series, of the
corporation or any such subsidiary which is owned directly or indirectly by the
Interested Stockholder (except as a result of immaterial changes due to
fractional share adjustment); or (5) any receipt by the Interested Stockholder
of the benefit (except proportionately as a stockholder of such corporation) of
any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
CHARTER AND BYLAW PROVISIONS
Nominations for the election of directors of City National may be made by
the Board of Directors or by any stockholder entitled to vote for the election
of directors. Stockholders intending to nominate a director candidate for
election must deliver written notice thereof to the Secretary of City National
not later than 60 days in advance of such meeting. Such notice must set forth
certain information concerning such stockholder and the stockholder's
nominee(s).
The City National Certificate provides that the City National Board of
Directors consists of three classes. The directors in each class serve on the
City National Board of Directors for approximately three years each.
Notwithstanding the foregoing, the directors who currently serve in class one
will serve through the 1998 City National shareholders' meeting, the directors
who currently serve in class two will serve through the 1999 City National
shareholders' meeting and the directors who currently serve in class three will
serve through the 2000 City National shareholders' meeting.
The annual meeting of stockholders is required to be held each year on the
third Tuesday in April or at such other date designated by the Board of
Directors. Under City National's Bylaws, a special meeting of stockholders may
be called only by the President of City National or by a majority of the Board
of Directors.
The City National Certificate requires the approval of the holders of at
least 70% of the outstanding Common Stock of City National for certain "Business
Combinations" between City National or any subsidiary and a "Restricted Person"
or its affiliates. Such business combinations include the sale or other
disposition of all, substantially all, or any substantial part of the assets or
business of City National or its subsidiaries; the purchase or other acquisition
of all, substantially all, or any substantial part of the assets
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or business of another person; a merger or consolidation; any reclassification
of securities or recapitalization designed to decrease the holders of any class
of City National's voting securities if, immediately thereafter, a Restricted
Person will be the owner of more than 35% of any such class; and the issuance of
voting securities, or rights, warrants or options to acquire any such securities
of City National or a subsidiary, to a Restricted Person. The foregoing
stockholder approval is not required for any business combination approved by
the Board of Directors (1) at a time when such other party was not a restricted
Person or (2) in advance by the affirmative votes of at least the number of
directors that is one less than the entire authorized number of directors of
City National, at a meeting called for such purpose. A "Restricted Person" is
any entity or group which, during any period of 12 consecutive months, directly
or indirectly acquired more than 5% of the shares of any class of voting
security of City National, except if the transaction in which such securities
were acquired was approved in advance by 66 2/3% of the Board of Directors. A
party ceases to be a Restricted Person at the end of 24 months following the
most recent month in which such securities were acquired which, together with
all other securities acquired in the immediately preceding 11 months, aggregated
more than 5% of the outstanding voting securities.
Under Delaware law, a certificate of incorporation can be amended by a
majority of shares entitled to vote thereon, except as the certificate of
incorporation otherwise provides or if the amendment relates to a provision
requiring a greater vote. The foregoing provision contained in the Certificate
of Incorporation of City National with respect to the requirements for a 70%
stockholder vote in certain business combinations can be repealed or amended
only with the approval of the holders of 70% of the outstanding City National
Stock at a meeting called for such purpose, excluding City National Stock owned
or controlled by a "Restricted Person" or its affiliates.
The foregoing provisions of the City National Certificate, the Bylaws, the
Rights Agreement and Section 203 of the Delaware Code have certain anti-takeover
effects. The provisions help ensure that the Board of Directors, if confronted
by a surprise proposal from a third party, will have sufficient time to review
the proposal and alternatives to the proposal. In addition, the provisions help
to insure that the holders of City National's stock are fairly treated in a
multi-step acquisition.
The provisions are intended to encourage persons seeking to acquire control
of City National to initiate such an acquisition through arms-length
negotiations with City National's Board of Directors. The provisions may have
the effect of discouraging a third party from making a tender offer or otherwise
attempting to attain control of City National, even through such an attempt
might be beneficial to City National and its stockholders.
LIMITATION ON DIRECTOR'S LIABILITY
City National has entered into indemnification agreements with certain
officers and directors of City National which provide that City National agrees
to indemnify and hold harmless such officer of director to the fullest extent
permissible under its Certificate of Incorporation, Bylaws and applicable law.
The indemnification agreements provide that rights granted thereunder cannot be
eliminated or lessened by amendment to City National's Certificate of
Incorporation or Bylaws.
In addition, City National's Certificate and City National Bank's Articles
of Association provide that, to the fullest extent permitted by the Delaware
Code and, in the case of City National Bank, except as prohibited by rules of
the OCC, a director of City National or City National Bank shall not be liable
to City National or City National Bank or their respective stockholders for
monetary damages for breach of fiduciary duty as a director. The Delaware Code
currently provides that a director may be relieved of liability for a breach of
fiduciary duty (including acts constituting gross negligence), except under
certain circumstances, including breach of the director's duty of loyalty to a
corporation or its stockholders, acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, unlawful payment
of a dividend or unlawful stock purchase or redemption or any transaction from
which the director derived an improper personal benefit.
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DISSENTERS' RIGHTS
RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of Harbor who dissent from the Merger by complying with the
procedures set forth in Chapter 13 of the California General Corporation Law
("Chapter 13") would be entitled to receive an amount equal to the fair market
value of their shares as of August 27, 1997, the last trading day before the
public announcement of the Merger. The closing bid price of Harbor Stock on
August 27, 1997 was $19.625. A copy of Chapter 13 is attached hereto as Appendix
B and should be read for more complete information concerning dissenters'
rights, THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13 MUST BE FOLLOWED EXACTLY
OR ANY DISSENTERS' RIGHTS MAY BE LOST. The information set forth below is a
general summary of dissenters' rights as they apply to Harbor shareholders and
is qualified in its entirety by reference to Appendix B.
In order to be entitled to exercise dissenters' rights, a shareholder of
Harbor must vote "AGAINST" the Merger. Thus, any shareholder who wishes to
dissent and executes and returns a proxy in the accompanying form must specify
that his or her shares are to be voted "AGAINST" the Merger. If the shareholder
returns a proxy without voting instructions or with instructions to vote "FOR"
the Merger, his or her shares will automatically be voted in favor of the Merger
and the shareholder will lose any dissenters' rights. In addition, if the
shareholder abstains from voting his or her shares, the shareholder will lose
his or her dissenters' rights.
Furthermore, in order to preserve his or her dissenters' rights, a
shareholder must make a written demand upon Harbor for the purchase of
dissenting shares and payment to such shareholder of their fair market value,
specifying the number of shares held of record by such shareholder and a
statement of what the shareholder claims to be the fair market value of those
shares as of August 27, 1997. Such demand must be addressed to Harbor Bancorp,
11 Golden Shore, Long Beach, California 90802; Attention: Melissa Lanfre, and
must be received by Harbor not later than the date of the Meeting. A vote
"Against" the Merger does not constitute such written demand.
If the Merger is approved by the shareholders, Harbor will have ten days
after such approval to send to those shareholders who have voted against the
approval of the Merger written notice of such approval accompanied by a copy of
Chapter 13, a statement of the price determined by Harbor to represent the fair
market value of the dissenting shares as of August 27, 1997, and a brief
description of the procedure to be followed if a shareholder desires to exercise
dissenters' rights. Within 30 days after the date on which the notice of the
approval of the Merger is mailed, the dissenting shareholder must surrender to
Harbor at the office designated in the notice of approval, the certificates
representing the dissenting shares to be stamped or endorsed with a statement
that they are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed. Any shares of Harbor Stock that
are transferred prior to their submission for endorsement lose their status as
dissenting shares.
If Harbor and the dissenting shareholder agree that the surrendered shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Payment of the fair
market value of the dissenting shares shall be made within 30 days after the
amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later,
subject to the surrender of the certificates therefor, unless provided otherwise
by agreement.
If Harbor denies that the shares surrendered are dissenting shares, or
Harbor and the dissenting shareholder fail to agree upon a fair market value of
such shares of Harbor Stock, then the dissenting shareholder of Harbor must,
within six months after the notice of approval is mailed, file a complaint in
the Superior Court of the proper county requesting the court to make such
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenters' rights are lost. If
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the fair market value of the dissenting shares is at issue, the court will
determine, or will appoint one or more impartial appraisers to determine, such
fair market value.
A dissenting shareholder may not withdraw his or her dissent or demand for
payment unless Harbor consents to such withdrawal.
In the event a person who makes a timely written demand for purchase and
votes against the Merger subsequently files an Effective Election Statement
before the Election Deadline, he or she will be deemed to have waived his or her
dissenters' rights, and his or her shares will be converted into City National
Stock or cash or both in accordance with the instructions given in the Effective
Election Statement.
FEDERAL INCOME TAX TREATMENT OF DISSENTERS
Any shareholder of Harbor who effectively dissents from the Merger (see
"Rights of Dissenting Shareholders," above) and who receives cash for his or her
shares will recognize a gain (or loss) for federal income tax purposes equal to
the amount by which the cash received for those shares exceeds (or is less than)
the shareholder's tax basis for the shares. The amount of that gain (or loss),
if any, will be treated as ordinary income (or loss), long-term capital gain (or
loss) subject to the Preferential Rates, long-term capital gain (or loss) not
subject to the Preferential Rates, or short-term capital gain (or loss)
depending on the length of time the shares are held by the dissenter, whether
the shares are held as a capital asset, and whether the dissenter is deemed to
own shares of Harbor Stock pursuant to the attribution rules of Section 318 of
the Code. In certain circumstances, a dissenter can be deemed for tax purposes
to own shares that are actually owned by a non-dissenter that is related to the
dissenter, with the possible result that the cash received in the exercise of
the dissenter's rights could be treated as a dividend received pursuant to a
corporate distribution rather than an amount received pursuant to a sale or
exchange of Harbor Stock. See "THE MERGER--Certain Federal Income Tax
Consequences--Possible Treatment of Cash as a Dividend." Because the tax
treatment of dissenting shareholders depends upon their individual
circumstances, such shareholders are urged to consult their own tax advisors.
COMPARISON OF RIGHTS OF HOLDERS OF CITY NATIONAL STOCK AND HARBOR STOCK
City National is incorporated under the laws of the State of Delaware and
Harbor is incorporated under the laws of the State of California. Shareholders
whose rights as shareholders are currently governed by California law and the
Harbor Articles and Harbor Bylaws, will, in the event that such shareholders
receive City National Stock as full or partial consideration in the Merger,
become shareholders of City National, and their rights as such will be governed
by Delaware law and the City National Certificate and City National By-laws.
Certain differences between the rights of holders of shares of City National
Stock and shares of Harbor Stock are summarized below.
The following summary does not purport to be a complete statement of the
rights of shareholders under the applicable California laws and the Harbor
Articles and Harbor Bylaws as compared with the rights of City National
shareholders under the applicable Delaware laws, the City National Certificate
and City National By-laws or a complete description of the specific provisions
referred to herein. The identification of specific differences is not meant to
indicate that other equally or more significant differences do not exist. The
summary is qualified in its entirety by reference to the Delaware Code and the
California Code and the governing corporate instruments of City National and
Harbor, to which such shareholders are referred.
CERTAIN VOTING RIGHTS
California law generally requires approval of any reorganization (which
includes a merger, certain exchange reorganizations and certain sale-of-asset
reorganizations) or sale of all or substantially all of the assets of a
corporation by the affirmative vote of the holders of a majority (unless the
articles of
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incorporation require a higher percentage) of the outstanding shares of each
class of capital stock of the corporation entitled to vote thereon. The Harbor
Articles do not require a higher percentage.
Under Delaware law, any merger, consolidation or sale of all or
substantially all of the assets of a corporation requires the approval of the
holders of a majority (unless the certificate of incorporation requires a higher
percentage) of the outstanding shares of such corporation entitled to vote
thereon. The City National Certificate does not require a higher percentage
except with respect to certain "business combinations" with restricted persons
as more particularly described below.
In general, under California law, no approval of a reorganization is
required by the holders of the outstanding shares in the case of any corporation
if such corporation, or its shareholders immediately before such reorganization,
or both, own, immediately after such reorganization, equity securities (other
than warrants or rights) of the surviving or acquiring corporation, or the
parent of either of the constituent corporations, possessing more than
five-sixths of the voting power of such surviving or acquiring corporation or
such parent.
Delaware law provides that (unless required by the certificate of
incorporation) no authorization by stockholders of a surviving or acquiring
corporation is necessary for a merger if (1) the merger does not amend the
certificate of incorporation of the corporation, (2) each share of stock of the
corporation outstanding prior to the merger remains identical after the merger,
and (3) either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into such shares are to be issued
or delivered under the plan of merger or the authorized unissued shares or the
treasury shares of common stock of the corporation to be issued or delivered
under the merger plus shares issuable upon conversion of any other shares,
securities or obligations to be issued or delivered under the merger do not
exceed 20% of the shares of common stock of the corporation outstanding prior to
the merger. The City National Certificate does not require stockholder
authorization for mergers of the type described in the preceding sentence.
Notwithstanding the foregoing, the City National Certificate requires the
approval of the holders of at least 70% of the outstanding shares of City
National Stock for certain "business combinations" between City National or any
subsidiary and a "Restricted Person" (as hereinafter defined) or its affiliates.
Such business combinations include the sale or other disposition of all,
substantially all, or any substantial part of the assets or business of City
National or its subsidiaries; the purchase or other acquisition of all,
substantially all, or any substantial part of the assets or business of another
person; a merger or consolidation; any reclassification of securities or
recapitalization designed to decrease the holders of any class of City
National's voting securities if, immediately thereafter, a Restricted Person
will be the owner of more than 35% of any such class; and the issuance of voting
securities or rights, warrants or options to acquire any such securities of City
National or a subsidiary to a Restricted Person. The foregoing stockholder
approval is not required for any business combination approved by the Board of
Directors (1) at a time when such other party was not a Restricted Person or (2)
in advance by the affirmative votes of at least the number of directors that is
one less than the entire authorized number of directors of City National, at a
meeting called for such purpose. A "Restricted Person" is any entity or group
which, during any period of 12 consecutive months, directly or indirectly
acquired more than 5% of the shares of any class of voting security of City
National, except if the transaction in which such securities were acquired was
approved in advance by 66 2/3% of the board of directors. A party ceases to be a
Restricted Person at the end of 24 months following the most recent month in
which such securities were acquired which, together with all other securities
acquired in the immediately preceding 11 months, aggregated more than 5% of the
outstanding voting securities.
Under California law, a parent corporation may, without shareholder
approval, merge into itself a subsidiary of which it owns at least 90% of the
outstanding shares of each class of stock.
Similarly, Delaware law permits a merger of a 90% owned subsidiary
corporation into its parent without shareholder approval so long as the
resolution of the Board of Directors of the parent providing
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for the merger states the terms and conditions of the merger, including the
consideration to be given by the parent in exchange for the subsidiary shares
not owned by the parent.
DIVIDENDS
Generally, a California corporation may pay dividends out of retained
earnings or if, after giving effect thereto, (1) the sum of the assets
(excluding goodwill and certain other assets) of the corporation is at least
equal to 1 1/4 times its liabilities (excluding certain deferred credits) and
(2) the current assets of such corporation are at least equal to (A) its current
liabilities or (B) if the average of the earnings of such corporation before
taxes and interest expense for the two preceding fiscal years was less than the
average of the interest expense of such corporation for such fiscal years, 1 1/4
times its current liabilities. In addition, the ability of a California
corporation to pay dividends is restricted by certain limitations for the
benefit of certain preference shares.
Under Delaware law, a corporation may pay dividends out of surplus or, in
the event that no surplus exists, out of its net profits for the fiscal year in
which the dividend is declared or its net profits for the preceding fiscal year,
subject to certain limitations for the benefit of certain preference shares. The
City National Bylaws provide that the Board of Directors may, in accordance with
applicable law, declare dividends.
ELECTION OF DIRECTORS; BOARD OF DIRECTORS
Under California law (unless a listed corporation's articles of
incorporation or bylaws provide otherwise), any shareholder of a corporation is
entitled to cumulate his or her votes for the election of directors provided
that at least one shareholder has given notice at the meeting prior to the
voting of such shareholder's intention to cumulate his or her votes. Cumulative
votes may only be cast for candidates who have been nominated before the voting.
Harbor is not a listed corporation and therefore cannot eliminate cumulative
voting.
Delaware law permits cumulative voting in the election of directors of a
corporation if the certificate of incorporation of such corporation provides for
cumulative voting. The City National Certificate does not provide for cumulative
voting.
Under California law, a company which is not a listed corporation (such as
Harbor) is not permitted to classify its board of directors into different
classes.
Under Delaware law, City National is permitted to provide in its articles of
incorporation or in an initial bylaw for classification of its Board of
Directors into up to three classes. The City National Certificate provides that
the City National Board of Directors consists of three classes. The directors in
each class serve on the City National Board of Directors for approximately three
years each. Notwithstanding the foregoing, the directors who currently serve in
class one will serve through the 1998 City National shareholders' meeting, the
directors who currently serve in class two will serve through the 1999 City
National shareholders' meeting and the directors who currently serve in class
three will serve through the 2000 City National shareholders' meeting.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under California law the holders of at least 10% of the number of
outstanding shares of any class of stock may initiate a court action to remove
any director for cause. In addition, any or all of the directors of a California
corporation may be removed without cause by the affirmative vote of a majority
of the outstanding shares entitled to vote. However, no director may be removed
(unless the entire board is removed) when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast and the entire number of the
directors authorized at the time of the director's most recent election were
then being elected.
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<PAGE>
Under Delaware law, any or all directors of a corporation may be removed,
with or without cause, by the holders of a majority of the shares entitled to
vote at an election of directors. However, in the case of a corporation whose
board is classified, shareholders may remove directors only for cause, and in
the case of a corporation having cumulative voting, if less than the entire
board is to be removed, no director may be removed without cause if the votes
cast against his removal would be sufficient to elect him if then cumulatively
voted at an election of the entire board of directors, or, if there are classes
of directors, at an election of the class of directors of which he or she is a
part.
Under California law (unless otherwise provided in the articles of
incorporation or bylaws and except for a vacancy created by the removal of a
director), vacancies on the board of directors, including any vacancy resulting
from an increase in the authorized number of directors, may be filled by
approval of the board. In addition, any vacancy not filled by the directors may
be filled by the vote of the majority of shares entitled to vote at an annual or
special meeting. Neither the Harbor Articles nor the Harbor Bylaws provide
otherwise. Under Delaware law (unless otherwise provided in the articles of
incorporation or bylaws), vacancies and newly-created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors in office. Neither the City National Certificate nor
the City National Bylaws provides otherwise.
SPECIAL MEETINGS OF SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN CONSENT
Under California law, a special meeting of shareholders may be called by the
board of directors, the chairman of the board, the president or the holders of
shares entitled to cast not less than 10% of the votes at the meeting or such
additional persons as may be provided in the articles of incorporation or
bylaws. Neither the Harbor Articles nor the Harbor Bylaws permit any other
person to call a special meeting.
Under Delaware law, a special meeting of shareholders may be called by the
board of directors or such other persons as may be authorized by the certificate
of incorporation or by-laws. The City National Bylaws provide that a special
meeting may be called by the president and shall be called by the president or
secretary at the written request of a majority of the board of directors.
Under California law (unless otherwise provided in the articles) and the
Harbor Bylaws, any action which may be taken at a meeting of shareholders may
also be taken by the written consent of the holders of at least the same
proportion of outstanding shares as would be necessary to take such action at a
meeting at which all shares entitled to vote were present and voted, except that
California law provides that the election of directors by written consent
generally requires the unanimous consent of all shares entitled to vote for the
election of directors. The Harbor Articles do not provide otherwise.
Under Delaware law (unless otherwise provided in the certificate of
incorporation), any action which is required to be taken or may be taken at a
meeting of stockholders, may be taken by a written consent signed by the holders
of outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting. The City National
Certificate provides that such action may be taken by the written consent of the
holders of not less than a majority of the stock entitled to vote upon such
action if a meeting were held.
AMENDMENT OF BYLAWS
Under California law, bylaws may be adopted, amended or repealed either by
the vote of a majority of the outstanding shares entitled to vote thereon or
(subject to any restrictions in the articles of incorporation or bylaws) by the
approval of the board of directors, except that amendments to the bylaws
specifying or changing a fixed number of directors or the maximum or minimum
number or changing from a fixed to a variable board or vice versa may only be
adopted by approval of the affirmative vote of a majority of the outstanding
shares entitled to vote. There are no such further restrictions in the Harbor
Articles or Harbor Bylaws.
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<PAGE>
Under Delaware law, the power to adopt, amend or repeal by-laws is vested in
the stockholders entitled to vote unless the certificate of incorporation
confers the power to adopt, amend or repeal by-laws upon the directors as well.
The City National Certificate provides that the City National Bylaws may be
made, altered, amended or repealed by the board of directors.
AMENDMENT OF CHARTER
Under both California and Delaware law, amendments to the articles or
certificate of incorporation of a corporation generally require approval by vote
of the board of directors and the holders of a majority of outstanding shares
entitled to vote thereon and, where their rights are affected, by the holders of
a majority of the outstanding shares of a class, whether or not such class is
entitled to vote thereon by the provision of the charter.
DISSENTERS' RIGHTS
Under California law, in connection with the merger of a corporation for
which the approval of outstanding shares is required, dissenting shareholders of
such corporation who follow prescribed statutory procedures are entitled to
receive payment of the fair market value of their shares. For a more complete
description of such rights, see "DISSENTERS' RIGHTS."
Under Delaware law, appraisal rights are generally available for the shares
of any class or series of stock of a corporation in a merger or consolidation;
provided that no appraisal rights are available for the shares of any class or
series of stock which, at the record date for the meeting held to approve such
transaction, were either (1) listed on a national securities exchange or (2)
held of record by more than 2,000 stockholders; and further provided that no
appraisal rights are available to stockholders of the surviving corporation if
the merger did not require their approval. Notwithstanding the foregoing,
appraisal rights are available for such class or series if the holders thereof
receive in the merger or consolidation anything except: (1) shares of stock of
the corporation surviving or resulting from such merger or consolidation; (2)
shares of stock of any other corporation which at the effective date of the
merger or consolidation is either listed on a national securities exchange or
held of record by more than 2,000 stockholders; (3) cash in lieu of fractional
shares; or (4) any combination of the foregoing.
CERTAIN BUSINESS COMBINATIONS AND REORGANIZATIONS
Generally, Delaware law would prevent an "Interested Stockholder" (defined
as a person beneficially owning 15% or more of a corporation's outstanding
voting stock) from engaging in a Business Combination (as defined in Section 203
of the Delaware Code) with a corporation for three years following the date such
person became an Interested Stockholder unless: (1) before such person became an
Interested Stockholder, the board of directors of such corporation approved
either the business combination or the transaction in which the Interested
Stockholder became an Interested Stockholder; (2) upon consummation of the
transaction which resulted in the Interested Stockholder becoming an Interested
Stockholder, the Interested Stockholder owned at least 85% of the voting stock
of such corporation outstanding at the time the transaction commenced (excluding
stock held by (A) directors who are also officers and (B) employee stock
ownership plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer), or (3) at or subsequent to such time,
the Business Combination is (x) approved by the board of directors of such
corporation and (y) authorized at a meeting of stockholders by the affirmative
vote of the holders of at least 66 2/3% of the outstanding voting stock of such
corporation not owned by the Interested Stockholder.
Under California law, if a tender offer or written proposal to acquire a
corporation by a reorganization or certain sales of assets is made to a
corporation's shareholders by an Interested Party (as hereinafter defined) (each
an "Interested Party Proposal"), (1) an affirmative opinion in writing as to the
fairness of
62
<PAGE>
the consideration to the shareholders of such corporation must be delivered to
shareholders of such corporation (or, in the event that no shareholder approval
is required for the consummation of the transaction, to the corporation's board
of directors) and (2) such shareholders must be (A) informed of certain later
tender offers or written proposals for a reorganization or sale of assets made
by other persons and (B) afforded a reasonable opportunity to withdraw any vote,
consent or proxy previously given or shares previously tendered in connection
with the Interested Party Proposal. For the purposes of this paragraph,
"Interested Party" shall mean a person who is a party to the transaction and (x)
directly or indirectly controls the corporation that is the subject of the
tender offer or proposal; (y) is, or is directly or indirectly controlled by, an
officer or director of the subject corporation; or (z) is an entity in which a
material financial interest (as defined in Section 310 of the California Code)
is held by any director or executive officer of the subject corporation.
In addition, in connection with any merger transaction, California law
generally requires that, unless all shareholders of a class or series consent
(and except with respect to fractional shares), each share of such class or
series must be treated equally with respect to any distribution of cash,
property, rights or securities. California law also provides generally that if a
corporation that is party to a merger, or its parent, owns more than 50% but
less than 90% of the voting power of the other corporation that is party to such
merger, the nonredeemable shares of common stock of the controlled corporation
may be converted only into nonredeemable shares of the surviving corporation or
a parent party unless all of the shareholders of the class consent.
VALIDITY OF CITY NATIONAL STOCK
Certain legal matters concerning the City National Stock will be passed upon
for City National by Richard H. Sheehan, Jr. Senior Vice President and General
Counsel of City National. As of September 30, 1997, Mr. Sheehan owned
beneficially, directly or indirectly, 2,000 shares of City National Stock and
owned options exercisable for 10,250 shares of such stock.
EXPERTS
The consolidated financial statements of Harbor incorporated by reference in
this Proxy Statement/ Prospectus have been audited by Ernst & Young LLP,
independent auditors, for the periods indicated in their report thereon which is
included in Harbor's Annual Report on Form 10-KSB for the year ended December
31, 1996. The consolidated financial statements audited by Ernst & Young LLP
have been incorporated herein by reference in reliance on their report given on
the authority of said firm as experts in accounting and auditing.
Representatives of Ernst & Young LLP are expected to be present at the
Special Meeting and are expected to be available to respond to appropriate
questions.
The consolidated financial statements of City National incorporated by
reference in this Proxy Statement/Prospectus have been audited by KPMG Peat
Marwick LLP, independent auditors, for the periods indicated in their report
thereon which is included in the Annual Report on Form 10-K for the year ended
December 31, 1996. The consolidated financial statements audited by KPMG Peat
Marwick LLP have been incorporated herein by reference in reliance on their
report given on their authority as experts in accounting and auditing.
OTHER MATTERS
The Board of Directors of Harbor does not know of any matter to be presented
at the Special Meeting other than that set forth above. However, if other
matters come before the Meeting, it is the intention of the persons named in the
accompanying Proxy to vote the shares represented by the Proxy in their
discretion, taking into account any recommendations of the Board of Directors of
Harbor on such matters, and discretionary authority to do so is included in the
Proxy.
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<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Combined Balance Sheets as of
June 30, 1997 combine the historical consolidated balance sheets of City
National and Harbor as if the Merger had been effective on June 30, 1997, after
giving effect to the purchase accounting and other merger-related adjustments
described in the Notes to Pro Forma Condensed Combined Financial Statements. The
unaudited Pro Forma Combined Statements of Operations present the combined
consolidated results of operations of City National and Harbor for the six
months ended June 30, 1997 and the year ended December 31, 1996 as if the
Merger, the Riverside Merger and the Ventura Merger had been effective on
January 1, 1997 and January 1, 1996, respectively, after giving effect to the
purchase accounting and other merger-related adjustments described in the
respective accompanying notes.
Under the Merger Agreement, Harbor shareholders receiving City National
Stock will receive for each share of Harbor Stock held by them that fraction of
a share (or number of shares) of City National Stock equal to the Exchange
Ratio. The Exchange Ratio is determined by dividing $24.10 by the Final City
National Stock Price for Harbor, provided in the event the Final City National
Stock Price is between $31.9125 and $34.6875, the Exchange Ratio will be based
upon a Final City National Stock Price of $31.9125 and, accordingly, will be
fixed at 0.7552. In the event the Final City National Stock Price is above
$34.6875, the Exchange Ratio is determined by dividing 26.20 by the Final City
National Stock Price. In the event the Final City National Stock Price is less
than $23.5875, the Exchange Ratio will be based upon a Final City National Stock
Price of $23.5875 and, accordingly, will be fixed at 1.0217. Harbor has the
right to terminate the Merger if the Final City National Stock Price is less
than $17.00. Because the Exchange Ratio floats if the Final City National Stock
Price is between $23.5875 and $31.9125, the amount of goodwill and goodwill
amortization will not change if the Final City National Stock Price is between
$23.5875 and $31.9125. The Exchange Ratio based on the average of the closing
City National Stock prices on the twenty business days ended September 22, 1997
of 0.8040 was used in the unaudited Pro Forma Condensed Combined Financial
Statements. Pursuant to the Merger Agreement, not less than 48% of the aggregate
number of issued and outstanding shares of Harbor Stock as of the Effective Time
will be converted into shares of City National Stock.
The unaudited pro forma combined financial statements and accompanying notes
reflect the application of the purchase method of accounting. Under this method
of accounting, the purchase price will be allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the closing. As
described in the accompanying notes, estimates of the fair values of Harbor's
assets and liabilities have been combined with recorded values of the assets and
liabilities of City National. However, changes to the adjustments included in
the unaudited pro forma combined financial statements are expected as
evaluations of assets and liabilities are completed and as additional
information becomes available. See "THE MERGER--Accounting Treatment." In
addition, the results of operations of Harbor subsequent to June 30, 1997 will
affect the allocation of the purchase price. Accordingly, the final pro forma
combined amounts will differ from those set forth in the unaudited pro forma
combined financial statements.
The unaudited pro forma combined financial statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined company, or
of the financial position or results of operations of the combined company that
would have actually occurred had the Merger been in effect as of the date or for
the periods presented. The unaudited pro forma condensed financial statements of
City National and Harbor should be read in conjunction with the historical and
other pro forma information, including the respective notes thereto, which in
the case of City National, are incorporated by reference in this Proxy
Statement/Prospectus, and in the case of Harbor, are attached to this Proxy
Statement/Prospectus.
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<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CITY PRO FORMA
NATIONAL HARBOR PRO FORMA COMBINED
HISTORICAL HISTORICAL ADJUSTMENTS WITH HARBOR
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................................... $ 295,281 $ 20,083 $ (2,400) $ 312,964
Interest-bearing deposits in other banks................... 444 495 939
Federal funds sold and securities purchased under resale
agreements............................................... 30,500 (15,348) 15,152
Securities................................................. 826,441 11,219 837,660
Trading account securities................................. 47,259 47,259
Loans...................................................... 3,446,452 148,671 3,595,123
Less allowance for credit losses........................... 132,885 2,829 135,714
------------ ---------- ----------- ------------
Net loans................................................ 3,313,567 145,842 3,459,409
Premises and equipment, net................................ 36,719 1,783 (500) 38,002
Customers' acceptance liability............................ 4,810 -- 4,810
Other real estate.......................................... 10,238 549 10,787
Deferred tax asset......................................... 51,463 -- 1,260 48,103
(4,620)
Goodwill................................................... 26,350 -- 14,928 41,278
Other intangible assets.................................... 35,991 -- 11,000 46,991
Other assets............................................... 61,881 2,382 64,263
------------ ---------- ----------- ------------
Total assets............................................. $4,710,444 $ 212,853 $ 4,320 $ 4,927,617
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
LIABILITIES
Demand deposits............................................ $1,589,349 $ 90,585 $ 1,679,934
Interest bearing deposits.................................. 2,067,721 104,818 2,172,539
------------ ---------- ----------- ------------
Total deposits........................................... 3,657,070 195,403 3,852,473
Federal funds purchased and securities sold under
repurchase agreements.................................... 248,384 -- 248,384
Other short-term borrowings................................ 267,931 -- 267,931
Long-term debt............................................. 9,800 -- 9,800
Other liabilities.......................................... 50,234 1,151 3,000 53,245
(1,140)
Acceptances outstanding.................................... 4,810 -- 4,810
------------ ---------- ----------- ------------
Total liabilities........................................ 4,238,229 196,554 1,860 4,436,643
------------ ---------- ----------- ------------
SHAREHOLDERS' EQUITY
Common stock............................................... 486,145 16,299 (16,299) 491,032
4,887
Treasury shares, at cost................................... (13,930) -- 13,872 (58)
------------ ---------- ----------- ------------
Total shareholders' equity............................... 472,215 16,299 2,460 490,974
------------ ---------- ----------- ------------
Total liabilities and shareholders' equity............... $4,710,444 $ 212,853 $ 4,320 $ 4,927,617
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CITY PRO FORMA
NATIONAL COMPLETED PRO FORMA PRO FORMA HARBOR PRO FORMA COMBINED
HISTORICAL ACQUISITIONS ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS WITH HARBOR
------------ ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........ $ 145,028 1,927 $ 146,955 $ 6,901 $ 153,856
Interest on federal funds sold and
securities purchased under
resale agreements............... 583 117 (117) 583 502 (409) 676
Interest on securities............ 25,240 253 25,493 366 25,859
Interest on trading account
securities...................... 1,152 -- 1,152 -- 1,152
------------ ----------- ----- ----------- ----------- ----------- -----------
Total........................... 172,003 2,297 (117) 174,183 7,769 (409) 181,543
------------ ----------- ----- ----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on Deposits.............. 34,526 664 35,190 1,588 36,778
Interest on federal funds
purchased and securities sold
under repurchase agreements..... 6,408 -- 6,408 -- 6,408
Interest on other short-term
borrowings...................... 6,833 7 6,840 -- 6,840
Interest on long-term debt........ 1,672 -- 1,672 -- 1,672
------------ ----------- ----- ----------- ----------- ----------- -----------
Total........................... 49,439 671 50,110 1,588 51,698
------------ ----------- ----- ----------- ----------- ----------- -----------
NET INTEREST INCOME............... 122,564 1,626 (117) 124,073 6,181 (409) 129,845
PROVISION FOR CREDIT LOSSES....... -- -- -- 435 435
------------ ----------- ----- ----------- ----------- ----------- -----------
Net interest income after
provision for credit Losses..... 122,564 1,626 (117) 124,073 5,746 (409) 129,410
------------ ----------- ----- ----------- ----------- ----------- -----------
NONINTEREST INCOME.................. 26,039 340 26,379 565 26,944
NONINTEREST EXPENSE................. 87,409 1,460 329 89,198 5,067 1,285 95,550
Acquisition related expenses........ 1,830 2,877 4,707 -- 4,707
------------ ----------- ----- ----------- ----------- ----------- -----------
Income before taxes................. 59,364 (2,371) (446) 56,547 1,244 (1,694) 56,097
Income taxes........................ 21,803 (736) (146) 20,921 467 (503) 20,885
------------ ----------- ----- ----------- ----------- ----------- -----------
NET INCOME.......................... $ 37,561 $ (1,635) $ (300) $ 35,626 $ 777 $ (1,191) $ 35,212
------------ ----------- ----- ----------- ----------- ----------- -----------
------------ ----------- ----- ----------- ----------- ----------- -----------
NET INCOME PER SHARE................ $ 0.79 $ 0.74 $ 0.73
------------ ----------- -----------
------------ ----------- -----------
Shares used to compute net income
per share......................... 47,678 253 47,931 626 48,557
------------ ----- ----------- ----------- -----------
------------ ----- ----------- ----------- -----------
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CITY PRO FORMA
NATIONAL COMPLETED PRO FORMA PRO FORMA HARBOR PRO FORMA COMBINED
HISTORICAL ACQUISITIONS ADJUSTMENTS COMBINED HISTORICAL ADJUSTMENTS WITH HARBOR
------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........ 224,702 $ 31,486 $ 256,188 $ 12,750 $ 268,938
Interest on federal funds sold and
securities purchased under
resale agreements............... 3,562 2,064 (2,250) 3,376 859 (851) 3,384
Interest on securities............ 52,010 5,466 57,476 1,479 58,955
Interest on trading account
securities...................... 1,849 -- 1,849 -- 1,849
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total........................... 282,123 39,016 (2,250) 318,889 15,088 (851) 333,126
------------ ----------- ----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits.............. 54,756 11,639 66,395 3,055 69,450
Interest on federal funds
purchased and securities sold
under repurchase agreements..... 12,835 -- 12,835 3 12,838
Interest on other short-term
borrowings...................... 12,835 117 12,952 -- 12,952
Interest on long-term debt........ 1,963 -- 1,963 -- 1,963
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total........................... 82,389 11,756 94,145 3,058 97,203
------------ ----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME............... 199,734 27,260 (2,250) 224,744 12,030 (851) 235,923
PROVISION FOR CREDIT LOSSES....... -- 75 75 1,159 1,234
------------ ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for credit losses..... 199,734 27,185 (2,250) 224,669 10,871 (851) 234,689
------------ ----------- ----------- ----------- ----------- ----------- -----------
NONINTEREST INCOME.................. 43,995 4,759 48,754 1,189 49,943
NONINTEREST EXPENSE................. 143,895 25,014 5,954 174,863 10,180 2,570 187,613
Acquisition related expenses........ 700 648 1,348 -- 1,348
------------ ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes................. 99,134 6,282 (8,204) 97,212 1,880 (3,421) 95,671
Income taxes........................ 32,571 2,366 (2,706) 32,231 683 (1,019) 31,895
------------ ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME.......................... $ 66,563 $ 3,916 $ (5,498) $ 64,981 $ 1,197 $ (2,402) $ 63,776
------------ ----------- ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME PER SHARE................ $ 1.47 $ 1.37 $ 1.33
------------ ----------- -----------
------------ ----------- -----------
Shares used to compute net income
per share......................... 45,146 2,307 47,453 626 48,079
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
67
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
BALANCE SHEET
Assuming a Final City National Stock Price of between $23.5875 and $31.9125,
the total consideration value paid to the existing Harbor shareholders is
$34,107,000 with total cash consideration of $15,348,000 and the balance in City
National Stock.
The cash payment of $15,348,000 will be paid from the proceeds from the sale
of Federal funds. The number of shares to be tendered will be contingent upon
the Final City National Stock Price which is the average of the City National
Stock closing price in the twenty day period ending three business days before
the Effective Time. For the purpose of the Pro Forma Financial Statements, the
stock portion of the total consideration value is comprised of the issuance of
625,822 shares of City National Stock held as treasury stock as of June 30, 1997
with a market value of $29.975, the average of the City National Stock closing
in the twenty day period ended September 22, 1997. The issuance of the treasury
stock is recorded as a credit to shareholders' equity of $4,887,000 and a credit
to treasury stock of $13,872,000.
The purchase price of $35,607,000 which includes expenses of $400,000
directly attributable to the acquisition and a $1,100,000 payment to cash out
existing unexercised stock options is allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at June 30, 1997 in
accordance with APB No. 16. The table below reflects the adjustment of certain
assets and liabilities to estimated fair value and the resultant goodwill. Total
goodwill of approximately $14,928,000 is expected to be amortized over fifteen
years. Total core deposit intangibles of approximately $11,000,000 is expected
to be amortized over seven years.
<TABLE>
<CAPTION>
ADJUSTMENTS RELATED
TO
ACQUISITION
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Assets/liabilities
Cash................................................................. $ (2,400)
Core deposit intangibles............................................. 11,000
Fixed Assets......................................................... (500)
Deferred taxes created by core deposit intangibles................... (4,620)
Deferred taxes created by other acquisition adjustments.............. 1,260
Other liabilities.................................................... (1,140)
Remaining unallocated purchase price (Goodwill)...................... 14,928
</TABLE>
Included in the purchase price is $400,000 in direct costs to be paid
immediately prior to the Effective Time and an additional $900,000 liability
incurred in connection with existing severance contracts and with the
termination of contracts and a $3,000,000 adjustment to record Harbor's existing
leases to fair market value. Included in the total adjustment to Other
Liabilities is a $1,140,000 reduction in income taxes currently payable to
reflect the tax benefit related to the $900,000 liability incurred, the $500,000
fixed asset writeoff, the deductible portion of the $400,000 in direct costs to
be paid immediately prior to the Effective Time and the $1,100,000 payment made
immediately prior to the Effective Time to cash out certain of the Harbor stock
options (approximately 68,000 shares) held by Harbor's officers.
STATEMENT OF INCOME
(a) Decrease in interest on Federal funds sold is due to the utilization of
Federal funds sold to fund the cash portion of the purchase price. The loss in
interest income is estimated to be $409,000 and $851,000 for the six-month
period and 12-month period beginning January 1, 1997 and January 1, 1996,
respectively.
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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(b) Non-interest expense includes the amortization of core deposit
intangibles and goodwill for the six-month period beginning January 1, 1997 of
$788,000 and $497,000, respectively and for the 12-month period beginning
January 1, 1996 of $1,576,000 and $994,000, respectively.
(c) Additional income taxes are computed using a 42.0% tax rate. The tax
attributes of Harbor will carry over to City National including all assets and
liabilities and are recorded at amounts previously reflected, adjusted for
purchase price allocations.
(d) The pro forma combined net income per common share data are based on (i)
combined historical income of Harbor and City National assuming the Merger is
accounted for as a purchase and (ii) pro forma combined equivalent of the Harbor
Stock converted (as adjusted for an exchange ratio of .8040 of a share of City
National Stock for each share of Harbor Stock) and City National Stock as of
June 30, 1997 and December 31, 1996.
COMPLETED ACQUISITIONS
On January 17, 1997, City National Corporation competed the acquisition of
Ventura County National Bancorp. City National Corporation paid $49.1 million
for Ventura County National Bancorp by issuing approximately 1.3 million
treasury shares with an aggregate market value of $28.1 million and paid the
remainder, $21.0 million, in cash. This transaction was accounted for under the
purchase method of accounting and resulted in the creation of core deposit and
other intangibles of approximately $16.4 million and goodwill of approximately
$13.0 million.
On January 24, 1997, City National Bank completed its acquisition of
Riverside National Bank. City National Bank paid $41.4 million for Riverside
National Bank by issuing approximately 1.0 million treasury shares with an
aggregate market value of $20.7 million and paid the remainder, $20.7 million,
in cash. This transaction was accounted for under the purchase method of
accounting and resulted in the creation of core deposit and other intangibles of
$13.0 million and goodwill of approximately $14.0 million.
In the first quarter of 1997, City National Bank recorded $1.8 million in
acquisition related costs to cover certain integration expenses for VCNB Bancorp
and Riverside National Bank. In addition, VCNB Bancorp and Riverside National
Bank recorded charges totaling $2.9 million prior to the closing of the
acquisitions to cover payments to cash out certain unexercised stock options,
investment banking fees and legal fees related to the acquisitions.
The pro forma adjustments for these two completed acquisitions are as
follows:
(a) Decrease in interest on Federal funds sold is due to the utilization
of Federal funds sold to fund the cash portions of the purchase prices. The
loss in interest income is estimated to be $117,000 and $2,250,000 for the
six-month period and the 12-month period beginning January 1, 1997 and
January 1, 1996, respectively.
(b) Non-interest expense includes the amortization of core deposit
intangibles (over seven years) and goodwill (over fifteen years) for the
six-month period beginning January 1, 1997 and completion of the
acquisitions later in January 1997 for $231,000 and $98,000, respectively
and for the 12-month period beginning January 1, 1996 for $4,193,000 and
$1,761,000, respectively.
(c) Additional income taxes are computed using a 42.0% rate.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
CITY NATIONAL CORPORATION
AND
HARBOR BANCORP
AUGUST 28, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE I THE MERGER AND RELATED TRANSACTIONS
1.1 Structure of the Merger............................................................... A-1
1.2 Closing............................................................................... A-1
1.3 Effective Time........................................................................ A-2
1.4 Effects of the Merger................................................................. A-2
1.5 The Bank Merger....................................................................... A-2
1.6 California Requirements............................................................... A-2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
2.1 Effect on Capital Stock............................................................... A-2
2.2 Conversion of Harbor Common Stock..................................................... A-3
2.3 Election and Proration Procedures..................................................... A-3
2.4 Stock Options......................................................................... A-6
2.5 Adjustments for Dilution and Other Matters............................................ A-7
2.6 Conversion of Dissenting Common Stock................................................. A-7
ARTICLE III EXCHANGE OF SHARES
3.1 Exchange Procedures................................................................... A-7
3.2 Voting and Dividends.................................................................. A-8
3.3 No Liability.......................................................................... A-8
3.4 Withholding Rights.................................................................... A-9
ARTICLE IV CONDUCT PENDING THE MERGER
4.1 Conduct of Harbor's and the Bank's Business Prior to the Effective Time............... A-9
4.2 Forbearance by Harbor and its Subsidiaries............................................ A-9
4.3 Timeliness of CNC's Consent........................................................... A-12
4.4 Conduct by CNC Prior to the Effective Time............................................ A-12
ARTICLE V REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of Harbor and the Bank................................. A-12
</TABLE>
<TABLE>
<S> <C> <C>
(a) Recitals True.................................................. A-12
(b) Capital Stock.................................................. A-12
(c) Authority...................................................... A-12
(d) Subsidiaries................................................... A-13
(e) Approvals...................................................... A-13
(f) No Violations.................................................. A-13
(g) Community Reinvestment Act..................................... A-13
(h) Reports........................................................ A-13
(i) Financial Statements........................................... A-14
(j) Absence of Certain Changes or Events........................... A-14
(k) Taxes.......................................................... A-14
(l) Absence of Claims; Litigation.................................. A-15
(m) Regulatory Actions............................................. A-15
(n) Certain Agreements............................................. A-15
(o) Labor Matters.................................................. A-15
(p) Employee Benefit Plans......................................... A-15
(q) Insider Loans; Other Transactions.............................. A-17
(r) Title to Assets................................................ A-17
(s) Knowledge as to Conditions..................................... A-17
(t) Compliance with Laws........................................... A-17
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C>
(u) Fees.................................................................................. A-17
(v) Environmental......................................................................... A-17
(w) Allowance for Possible Loan Losses.................................................... A-19
(x) Performance of Obligations............................................................ A-19
(y) Insurance............................................................................. A-19
(z) Listing of Loans...................................................................... A-19
(aa) Derivative Transactions............................................................... A-20
(bb) Trust Administration.................................................................. A-20
(cc) Contingent Liabilities................................................................ A-20
(dd) Statements True and Correct........................................................... A-20
(ee) Accurate Disclosure................................................................... A-20
(ff) Tax Representation.................................................................... A-21
</TABLE>
<TABLE>
<S> <C> <C>
5.2 Representations and Warranties of CNC................................ A-21
</TABLE>
<TABLE>
<S> <C> <C>
(a) Recitals True.................................................. A-21
(b) Capital Stock.................................................. A-21
(c) Authority...................................................... A-21
(d) Approvals...................................................... A-21
(e) No Violations.................................................. A-21
(f) Financial Statements........................................... A-21
(g) Absence of Certain Changes or Events........................... A-21
(h) Absence of Claims.............................................. A-22
(i) Regulatory Actions............................................. A-22
(j) Knowledge as to Conditions..................................... A-22
(k) Compliance with Laws........................................... A-22
(l) Fees........................................................... A-22
(m) Community Reinvestment Act..................................... A-23
(n) Statements True and Correct.................................... A-23
(o) Accurate Disclosure............................................ A-23
(p) Tax Representation............................................. A-23
</TABLE>
<TABLE>
<S> <C> <C>
ARTICLE VI COVENANTS
6.1 Regulatory Matters................................................... A-23
6.2 Shareholders' Approvals.............................................. A-24
6.3 Legal Conditions to Merger........................................... A-24
6.4 Information.......................................................... A-25
6.5 Employee Benefits.................................................... A-26
6.6 Certain Filings, Consents and Arrangements........................... A-26
6.7 Additional Agreements................................................ A-26
6.8 Publicity............................................................ A-27
6.9 Notification of Certain Matters...................................... A-27
6.10 Pre-Closing Adjustments.............................................. A-27
6.11 Director Resignations................................................ A-27
6.12 Human Resources Issues............................................... A-27
6.13 Assistance with Third-Party Agreements............................... A-28
6.14 Notices and Communications........................................... A-29
6.15 Insurance Policies Assignment........................................ A-29
6.16 Additional Agreements................................................ A-29
6.17 Affiliates and Five Percent Shareholders............................. A-29
6.18 Cooperation.......................................................... A-29
6.19 Indemnification and Directors and Officers........................... A-29
6.20 Shareholder's Agreement.............................................. A-30
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C>
ARTICLE VII CONDITIONS TO CONSUMMATION
7.1 Conditions to Each Party's Obligations................................................ A-30
7.2 Conditions to Obligations of CNC...................................................... A-30
7.3 Conditions To Obligations of Harbor................................................... A-32
ARTICLE VIII TERMINATION
8.1 Termination........................................................................... A-33
8.2 Effect of Termination................................................................. A-34
ARTICLE IX OTHER MATTERS
9.1 Certain Definitions; Interpretations.................................................. A-34
9.2 Non-Survival of Representations, Warranties and Covenants............................. A-35
9.3 Waiver and Modification............................................................... A-35
9.4 Counterparts.......................................................................... A-35
9.5 Governing Law, Jurisdiction and Venue................................................. A-35
9.6 Notices............................................................................... A-36
9.7 Entire Agreement...................................................................... A-36
9.8 Binding Effect; Assignment............................................................ A-36
9.9 Severability.......................................................................... A-36
9.10 No Third Party Beneficiaries.......................................................... A-37
9.11 Specific Performance.................................................................. A-37
9.12 Expenses.............................................................................. A-37
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 28th day of August, 1997
(the "AGREEMENT"), by and between City National Corporation ("CNC"), a Delaware
corporation, and Harbor Bancorp, a California corporation ("HARBOR"), is entered
into with reference to the following:
A. CNC and Harbor are bank holding companies registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and subject to
regulation and supervision by the Board of Governors of the Federal Reserve
System (the "BOARD OF GOVERNORS");
B. The Boards of Directors of CNC and Harbor have determined that it is
in the best interests of their respective companies and shareholders to
consummate the business combination transaction provided for in this
Agreement;
C. The parties hereto desire to effect a business combination through a
merger (the "MERGER"), which will be structured so that Harbor will be
merged into CNC and that CNC will be the surviving corporation in the
Merger;
D. As a condition and inducement to CNC's willingness to enter into this
Agreement, Harbor and CNC are entering into, immediately after the execution
and delivery hereof, a Stock Option Agreement (the "STOCK OPTION AGREEMENT")
dated as of the date hereof, pursuant to which Harbor shall grant to CNC an
option to purchase shares of the common stock, no par value, of Harbor (the
"HARBOR COMMON STOCK");
E. The Merger requires certain shareholder and regulatory approvals and
may be effected only after the necessary approvals have been obtained;
F. For federal income tax purposes, it is intended that the Merger
shall qualify as a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "CODE");
G. The parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger; and
H. Subject to any specific provisions of this Agreement, it is the
intent of the parties that CNC by reason of this Agreement shall not (until
consummation of the Merger) control, and shall not be deemed to control
Harbor or any of its subsidiaries, directly or indirectly, and shall not
exercise or be deemed to exercise, directly or indirectly, a controlling
influence over the management or policies of Harbor or any of its
subsidiaries;
NOW, THEREFORE, in consideration of the promises and the mutual agreements
contained herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER AND RELATED TRANSACTIONS
SECTION 1.1 STRUCTURE OF THE MERGER. At the effective time of the Merger,
Harbor will merge with and into CNC, with CNC being the surviving corporation
(hereinafter sometimes called the "SURVIVING CORPORATION"), pursuant to the
provisions of, and with the effect provided in, the Delaware General Corporation
Law ("DGCL") and shall continue its corporate existence under the laws of the
State of Delaware. The name of the Surviving Corporation shall be "City National
Corporation." Upon consummation of the Merger, the separate corporate existence
of Harbor shall cease.
SECTION 1.2 CLOSING. The closing of the Merger (the "CLOSING") will take
place at 6:00 P.M. Pacific time, on the first Friday (unless such date is a
holiday, in which case it will be the preceding Business Day (as defined in
Section 9.1)) that is both (a) after satisfaction of each of the conditions set
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forth in Article VII; and (b) no less than four Business Days after the
occurrence of the Election Deadline (as defined in Section 2.3), or at such
other time as shall be determined in good faith by CNC in order to ensure an
orderly transition process; PROVIDED, that so long as all conditions set forth
in Article VII have been met by January 9, 1998, the Closing shall occur on
January 9, 1998; or at such other time as shall be mutually agreed upon by CNC
and Harbor.
SECTION 1.3 EFFECTIVE TIME. The Merger shall become effective as set forth
in the certificate of merger (the "CERTIFICATE OF MERGER") which shall be filed
with the Secretary of State of the State of Delaware on or before the date of
Closing. The term "EFFECTIVE TIME" shall be the date and time when the Merger
becomes effective, as set forth in the Certificate of Merger.
SECTION 1.4 EFFECTS OF THE MERGER.
(a) At the Effective Time, (i) Harbor shall be merged with and into CNC and
the separate existence of Harbor shall cease, (ii) the Certificate of
Incorporation of CNC as in effect immediately prior to the Effective Time shall
be the Certificate of Incorporation of Surviving Corporation, and (iii) the
Bylaws of CNC as in effect immediately prior to the Effective Time shall remain
the Bylaws of Surviving Corporation.
(b) At and after the Effective Time, the Merger will have the effects set
forth in the DGCL.
SECTION 1.5 THE BANK MERGER. After the Merger, Harbor Bank (the "BANK")
shall be merged with or into City National Bank ("CNB"), a wholly owned
subsidiary of CNC, pursuant to the Bank Merger Act and other applicable federal
and state laws and regulations (the "BANK MERGER").
SECTION 1.6 CALIFORNIA REQUIREMENTS. CNC and Harbor shall each execute,
deliver and/or certify each and every document, certificate or other instrument
required under the California General Corporation Law (the "CGCL") to be filed
with the Secretary of State of the State of California in order for the
effectiveness of the Merger to be recognized in California. CNC shall file such
items no later than three Business Days following the Effective Time.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL
STOCK OF THE CONSTITUENT CORPORATIONS
SECTION 2.1 EFFECT ON CAPITAL STOCK. Subject to the other provisions of
this Article II, at the Effective Time, by virtue of the Merger and without any
additional action on the part of the holders of shares of stock of Harbor and
CNC:
(a) COMMON STOCK OF CNC. Each share of common stock; $1.00 par value per
share of CNC (the "CNC COMMON STOCK") issued and outstanding immediately prior
to the Effective Time shall remain an issued and outstanding share of common
stock of the Surviving Corporation, and shall not be affected by the Merger;
(b) COMMON STOCK OF HARBOR. Each share of common stock, no par value per
share of Harbor ("Harbor Common Stock") issued and outstanding immediately prior
to the Effective Time, shall be converted into the right to receive CNC Common
Stock or cash as provided in Section 2.2(a);
(c) DISSENTING COMMON STOCK. Each share of Harbor Common Stock that is a
"dissenting share" within the meaning of Chapter 13 of the CGCL ("DISSENTING
COMMON STOCK") shall not be converted into or represent a right to receive CNC
Common Stock or cash hereunder unless and until such shares have lost their
status as dissenting shares under Chapter 13 of the CGCL, at which time such
shares shall either be converted into cash or CNC Common Stock pursuant to
Section 2.6.
(d) CANCELLATION OF CERTAIN SHARES. Any shares of Harbor Common Stock held
by CNC (or any of its wholly owned Subsidiaries) or Harbor (or any of its wholly
owned Subsidiaries), other than those held in
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<PAGE>
a fiduciary capacity or as a result of debts previously contracted, shall be
canceled and retired at the Effective Time and no consideration shall be issued
in exchange therefor.
SECTION 2.2 CONVERSION OF HARBOR COMMON STOCK.
(a) Subject to the other provisions of this Article II, each share of Harbor
Common Stock issued and outstanding immediately prior to the Effective Time
(other than Dissenting Common Stock and Common Stock described in Section
2.1(d)) shall, by virtue of the Merger, be converted into the right to receive,
at the election of the holder thereof as provided in Section 2.3, either:
(i) a fraction of a share of CNC Common Stock equal to the quotient
(such quotient, the "EXCHANGE RATIO") of (i) $24.10, divided by (ii) the
average of the daily closing prices of a share of CNC Common Stock on the
New York Stock Exchange for the twenty consecutive trading days ending on
the third trading day immediately prior to the Effective Time (such average,
the "FINAL CNC STOCK PRICE"); provided, in the event that the Final CNC
Stock Price shall be more than $31.9125 but less than or equal to $34.6875
(the "INTERIM CEILING PRICE"), the Exchange Ratio shall be .7552, and in the
event that the Final CNC Stock Price shall be less than $23.5875 (the "FLOOR
PRICE"), the Exchange Ratio shall be 1.0217; and provided further, that in
the event that the Final CNC Stock Price shall be more than $34.6875, the
Exchange Ratio shall be $26.20 divided by the Final CNC Stock Price; or
(ii) cash in the amount of $24.10 (such amount, the "PER SHARE CASH
CONSIDERATION"); or
(iii) a combination of CNC Common Stock and cash in the amounts as set
forth in Subsections 2.2(a)(i) and (a)(ii) above.
(b) At the Effective Time, the stock transfer books of Harbor shall be
closed as to holders of Harbor Common Stock immediately prior to the Effective
Time and no transfer of Harbor Common Stock by any such holder shall thereafter
be made or recognized. If, after the Effective Time, certificates are properly
presented in accordance with Article III of this Agreement to the Exchange Agent
(as defined in Section 2.3), such certificates shall be canceled and exchanged
for certificates representing the number of whole shares of CNC Common Stock, if
any, and/or a check representing the amount of cash, if any, into which the
Harbor Common Stock represented thereby was converted in the Merger, plus any
payment for a fractional share of CNC Common Stock.
SECTION 2.3 ELECTION AND PRORATION PROCEDURES.
(a) ELECTION FORMS AND TYPES OF ELECTIONS. An election form and other
appropriate and customary transmittal materials (which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
theretofore representing shares of Common Stock shall pass, only upon proper
delivery of such certificates to an exchange agent selected by CNC and
reasonably acceptable to Harbor (the "EXCHANGE AGENT")) in such form as CNC and
Harbor shall mutually agree ("ELECTION FORM") shall be mailed no less than
thirty-five days prior to the Effective Time or on such other date as Harbor and
CNC shall mutually agree ("MAILING DATE") to each holder of record of Harbor
Common Stock as of five Business Days prior to the Mailing Date ("ELECTION FORM
RECORD DATE"). CNC shall make available one or more Election Forms as may be
reasonably requested by all persons who become holders (or beneficial owners) of
Harbor Common Stock after the Election Form Record Date and prior to the
Election Deadline (as defined herein), and Harbor shall provide to the Exchange
Agent all information reasonably necessary for it to perform its obligations as
specified herein. Each Election Form shall permit the holder (or the Beneficial
Owner through appropriate and customary documentation and instructions) to elect
(an "ELECTION") to receive either (i) CNC Common Stock (a "STOCK ELECTION") with
respect to all of such holder's Harbor Common Stock, or (ii) cash (a "CASH
ELECTION") with respect to all of such holder's Harbor Common Stock, or (iii) a
specified number of shares of Harbor Common Stock to receive CNC Common Stock (a
"COMBINATION STOCK ELECTION") and a specified number of shares of Harbor Common
Stock to receive cash (a "COMBINATION CASH ELECTION"). Any Harbor Common Stock
(other than Dissenting Common Stock) with respect to which the holder (or the
Beneficial Owner, as the case may be) shall not have submitted to
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<PAGE>
the Exchange Agent, an effective, properly completed Election Form received
prior to the Election Deadline shall be deemed to be "UNDESIGNATED SHARES"
hereunder.
(b) PROPER AND TIMELY ELECTION. Any Election shall have been properly made
and effective only if the Exchange Agent shall have actually received a properly
completed Election Form by 5:00 P.M. on the later of the 30th day following the
Mailing Date or the 31st day following the mailing of any notice required by
Section 1301 of the CGCL (or such other time and date as CNC and Harbor may
mutually agree) (the "ELECTION DEADLINE"). An Election Form shall be deemed
properly completed only if an Election is indicated for each share of Harbor
Common Stock covered by such Election Form and if accompanied by one or more
certificates (or customary affidavits and indemnification regarding the loss or
destruction of such certificates or the guaranteed delivery of such
certificates) representing all shares of Harbor Common Stock covered by such
Election Form, together with duly executed transmittal materials included in or
required by the Election Form. Any Election Form may be revoked or changed by
the person submitting such Election Form at or prior to the Election Deadline.
In the event an Election Form is revoked prior to the Election Deadline, the
shares of Harbor Common Stock represented by such Election Form shall
automatically become Undesignated Shares unless and until a new Election is
properly made with respect to such shares on or before the Election Deadline,
and CNC shall cause the certificates representing such shares of Harbor Common
Stock to be promptly returned without charge to the person submitting the
revoked Election Form upon written request to that effect from the holder who
submitted such Election Form. Subject to the terms of this Agreement and of the
Election Form, the Exchange Agent shall have reasonable discretion to determine
whether any election, revocation or change has been properly or timely made and
to disregard immaterial defects in the Election Forms, and any decisions of CNC
and Harbor required by the Exchange Agent and made in good faith in determining
such matters shall be binding and conclusive. Neither CNC nor the Exchange Agent
shall be under any obligation to notify any person of any defect in an Election
Form.
(c) PAYMENT AND PRORATION. As promptly as practicable but not later than
ten calendar days after the Effective Time, CNC shall cause the Exchange Agent
to effect the allocation among the holders of Harbor Common Stock of rights to
receive CNC Common Stock or cash in the Merger in accordance with the Election
Forms as follows:
(i) if the aggregate number of shares of Harbor Common Stock as to which
Stock Elections and Combination Stock Elections shall have effectively been
made results in the issuance of CNC Common Stock pursuant to the Merger that
would be at least 48% of the aggregate value of the total consideration paid
(valued at the average of the high and low trading prices on the date on
which the Effective Time occurs) in exchange for shares of Harbor Common
Stock (the "MINIMUM STOCK AMOUNT"), but does not result in the issuance of
CNC Common Stock exceeding (A) 55% of the consideration paid in exchange for
shares of Harbor Common Stock, less (B) the number of Substitute Options
granted (the "MAXIMUM STOCK AMOUNT"), then:
(A) Each holder of Harbor Common Stock who made an effective Stock
Election or Combination Stock Election shall receive the number of shares
of CNC Common Stock equal to the product of the Exchange Ratio multiplied
by the number of shares of Harbor Common Stock covered by such Stock
Election or Combination Stock Election; and
(B) Each holder of Harbor Common Stock who made an effective Cash
Election or Combination Cash Election, and each holder of Undesignated
Shares and Dissenting Common Stock shall receive the Per Share Cash
Consideration.
(ii) if the aggregate number of shares of Harbor Common Stock as to
which Stock Elections and Combination Stock Elections shall have effectively
been made exceeds, and is not approximately equal to, the Maximum Stock
Amount, then:
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(A) Each holder of Harbor Common Stock who made an effective Cash
Election or Combination Cash Election shall receive the Per Share Cash
Consideration;
(B) All Undesignated Shares and Dissenting Common Stock shall be
deemed to have made Cash Elections; and
(C) A stock proration factor (the "STOCK PRORATION FACTOR") shall be
determined by dividing the Maximum Stock Amount by the total number of
shares of Harbor Common Stock with respect to which effective Stock
Elections and Combination Stock Elections were made. Each holder of
Harbor Common Stock who made an effective Stock Election or Combination
Stock Election shall be entitled to:
(I) the number of shares of CNC Common Stock equal to the product
of (x) the Exchange Ratio, multiplied by (y) the number of shares of
Harbor Common Stock covered by such Stock Election or Combination
Stock Election, multiplied by (z) the Stock Proration Factor; and
(II) cash in an amount equal to the product of (x) the Per Share
Cash Consideration, multiplied by (y) the number of shares of Harbor
Common Stock covered by such Stock Election or Combination Stock
Election, multiplied by (z) one minus the Stock Proration Factor.
(iii) if the aggregate number of shares of Harbor Common Stock as to
which Stock Elections and Combination Stock Elections shall have effectively
been made shall be less than the Minimum Stock Amount, then:
(A) Each holder of Harbor Common Stock who made an effective Stock
Election or Combination Stock Election shall receive the number of shares
of CNC Common Stock equal to the product of the Exchange Ratio multiplied
by the number of shares of Harbor Common Stock covered by such Stock
Election or Combination Stock Election;
(B) the Exchange Agent shall select by lot such number of holders of
Undesignated Shares to receive CNC Common Stock as shall be necessary so
that the shares of CNC Common Stock to be received by those holders, when
combined with the number of shares for which a Stock Election or
Combination Stock Election has been made shall be equal to at least the
Minimum Stock Amount. If all the Undesignated Shares plus all shares as
to which Stock Elections and Combination Stock Elections have been made
together are less than, and not approximately equal to, the Minimum Stock
Amount, then:
(C) a cash proration factor (the "CASH PRORATION FACTOR") shall be
determined by dividing the Minimum Stock Amount (less the shares for
which an effective Stock Election and Combination Stock Election has been
made, plus all the Undesignated Shares) by the sum of the total number of
shares of Harbor Common Stock with respect to which effective Cash
Elections and Combination Cash Elections were made. Each holder of Harbor
Common Stock who made an effective Cash Election or Combination Cash
Election shall be entitled to:
(I) cash equal to the product of (x) the Per Share Cash
Consideration, multiplied by (y) the number of shares of Harbor
Common Stock covered by such Cash Election or Combination Cash
Election, multiplied by (z) one minus the Cash Proration Factor; and
(II) the number of shares of CNC Common Stock equal to the
product of (x) the Exchange Ratio, multiplied by (y) the number of
shares of Harbor Common Stock covered by such Cash Election or
Combination Cash Election, multiplied by (z) the Cash Proration
Factor.
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(iv) Notwithstanding any other provision of this Agreement, if, after
applying the allocation rules set forth in the preceding subsections of this
Section 2.3(c), the aggregate value of the CNC Common Stock that would be
issued pursuant to the Merger (valued at the average of the high and low
trading prices on the date on which the Effective Time occurs) is less than
48% of the aggregate value of the total consideration to be paid in exchange
for Harbor Common Stock, CNC and Harbor shall be authorized to reallocate,
in good faith and in such a manner as they reasonably determine to be fair
and equitable, shares of CNC Common Stock and cash among the holders of
Harbor Common Stock, or to vary the number of shares of CNC Common Stock to
be issued in the Merger, in a manner such that the number of shares of CNC
Common Stock to be issued in the Merger shall not be less than the Minimum
Stock Amount.
(d) CALCULATIONS. The calculations required by Section 2.2(a)(i) shall be
prepared by CNC prior to the Effective Time and shall be set forth in a
certificate executed by the Chief Financial Officer of CNC and furnished to
Harbor at least two Business Days prior to the Effective Time showing the manner
of calculation in reasonable detail. Any calculation of a portion of a share of
CNC Common Stock shall be rounded to the nearest ten-thousandth of a share, and
any cash payment shall be rounded to the nearest cent. For purposes of this
Section 2.3, the shares of Harbor Common Stock for which CNC Common Stock is to
be issued as consideration in the Merger shall be deemed to be "approximately
equal" to the Maximum Stock Amount or the Minimum Stock Amount if such number is
within 10,000 shares of Harbor Common Stock of such amount.
(e) NO FRACTIONAL SHARES. Notwithstanding any other provisions of this
Agreement, each holder of shares of Harbor Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of a
share of CNC Common Stock (after taking into account all certificates delivered
by such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of CNC Common Stock multiplied
by the Final CNC Stock Price (as defined in Section 2.2). No holder will be
entitled to dividends, voting rights or any other rights as a shareholder in
respect of any fractional share of CNC Common Stock.
SECTION 2.4 STOCK OPTIONS. At least 30 days prior to the anticipated
Effective Time, CNC shall notify each employee of Harbor who owns options
pursuant to the Harbor Bancorp 1990 Stock Option Plan (the "OPTION PLAN")
whether such employee is or is not being offered employment with CNC or CNB
following the Effective Time. Options held pursuant to the Option Plan shall be
treated as follows:
(a) For each option held by a Harbor employee who is not offered a position
with CNC or CNB following the Merger, Harbor shall take appropriate action as
permitted by the Option Plan to cancel such option in consideration of the
payment by Harbor to each holder of such options of an aggregate amount in cash
equal to the positive difference, if any, between (i) the Per Share Cash
Consideration times the number of shares of Harbor Common Stock as to which such
holder has options, and (ii) the aggregate exercise price of such options. At
the Effective Time, each option to purchase a share of Common Stock pursuant to
the Option Plan shall terminate and be of no further force or effect, and any
rights thereunder to purchase shares of Harbor Common Stock or CNC Common Stock
shall also terminate and be of no further force or effect.
(b) For each option held by a Harbor employee who is offered employment with
CNC or CNB following the Merger, such employee may elect, not later than 15 days
prior to the anticipated Effective Time, either (i) to receive cash under the
same terms as described in Subsection (a) above, or (ii) in exchange for
terminating such option, receive an option (a "SUBSTITUTE OPTION") to purchase
CNC Common Stock. The number of shares of CNC Common Stock subject to each
Substitute Option shall be equal to the number of shares of Harbor Common Stock
subject to the related Harbor option immediately prior to the Effective Time,
multiplied by the Exchange Ratio, and the per share exercise price under each
such Substitute Option shall be determined by dividing the per share exercise
price under the related Harbor option by the Exchange Ratio and rounding down to
the nearest cent; PROVIDED, however, that the number
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of shares or other securities, property or case for which each such Substitute
Option is exercisable and/or the exercise price of each such Substitute Option
shall, in accordance with its terms, be subject to further adjustment as
appropriate to reflect any stock split, stock dividend, recapitalization or
other similar transaction subsequent to the Effective Time. Substitute Options
shall contain terms and conditions at least as favorable to the employee (not
including any accelerated vesting that would occur as a result of the Merger),
as the terms of the existing Harbor options, subject to any requirements of the
CNC option plan, and shall otherwise contain terms and conditions substantially
identical to options issued to CNC or CNB employees pursuant to CNC's option
plan.
SECTION 2.5 ADJUSTMENTS FOR DILUTION AND OTHER MATTERS. If prior to the
Effective Time, (a) Harbor shall declare a stock dividend or distribution on the
Harbor Common Stock, or subdivide, split up, reclassify or combine the Harbor
Common Stock, or declare a dividend, or make a distribution, on the Harbor
Common Stock, in any security convertible into Common Stock (provided that no
such action may be taken by Harbor without CNC's prior written consent as
provided in Section 4.2 (b)), or (b) the outstanding shares of CNC Common Stock
shall have been increased, decreased, changed into or exchanged for a different
number or kind of shares or securities, in each case as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar change in CNC's capitalization, then an
appropriate adjustment or adjustments will be made to the Exchange Ratio
(including the Final CNC Stock Price and the Final CNC Stock Prices below and
above which the Exchange Ratio is a specified amount pursuant to Section 2.2).
SECTION 2.6 CONVERSION OF DISSENTING COMMON STOCK.
(a) Harbor shall give CNC prompt notice upon receipt by Harbor of any
written demands for appraisal rights, withdrawal of such demands, and any other
documents received or instruments served pursuant to Chapter 13 of the CGCL and
shall give CNC the opportunity to direct all negotiations and proceedings with
respect to such demands. Harbor shall not voluntarily make any payment with
respect to any demands for appraisal rights and shall not, except with the prior
written consent of CNC, settle or offer to settle such demands. Each holder of
Common Stock who becomes entitled, pursuant to provisions of said Chapter 13 of
the CGCL, to payment for his or her shares of Dissenting Common Stock under the
provisions of said Chapter shall receive payment therefor from CNC and such
shares of Common Stock shall be canceled.
(b) If prior to the Election Deadline any shareholder of Harbor shall fail
to perfect, or shall effectively withdraw or lose, his or her rights under
Chapter 13 of the CGCL, the Dissenting Common Stock of such holder shall be
treated for purposes of this Article II as any other shares of outstanding
Common Stock. If, after the Election Deadline, any holder of Common Stock shall
fail to perfect, or shall effectively withdraw or lose, his or her right to
appraisal of and payment for his or her Dissenting Common Stock under Chapter 13
of the CGCL, each share of Dissenting Common Stock of such holder shall be
deemed to be an Undesignated Share and shall be converted into the right to
receive the consideration payable to holders of Undesignated Shares pursuant to
this Article II.
ARTICLE III
EXCHANGE OF SHARES
SECTION 3.1 EXCHANGE PROCEDURES.
(a) EXCHANGE AGENT. No later than the Effective Time, CNC shall deposit
with the Exchange Agent the number of shares of CNC Common Stock issuable in the
Merger and the amount of cash payable in the Merger. The Exchange Agent shall
not be entitled to vote or exercise any rights of ownership with respect to CNC
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect to such shares for the account of the persons entitled thereto.
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(b) EXCHANGE OF CERTIFICATES AND CASH. After completion of the allocation
procedure set forth in Section 2.3, each holder of a certificate formerly
representing Harbor Common Stock (other than Dissenting Common Stock) who
surrenders or has surrendered such certificate (or customary affidavits and
indemnification regarding the loss or destruction of such certificate), together
with duly executed transmittal materials included in or required by the Election
Form, to the Exchange Agent shall, upon acceptance thereof, be entitled to a
certificate representing CNC Common Stock and/or cash into which the shares of
Common Stock shall have been converted pursuant hereto, as well as cash in lieu
of any fractional shares of CNC Common Stock to which such holder would
otherwise be entitled. The Exchange Agent shall accept such Harbor certificate
upon compliance with such reasonable and customary terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal practices. Until surrendered as contemplated by this Section 3.1,
each certificate representing Harbor Common Stock shall be deemed from and after
the Effective Time to evidence only the right to receive cash and/or CNC Common
Stock, as the case may be, upon such surrender. CNC shall not be obligated to
deliver the consideration to which any former holder of Common Stock is entitled
as a result of the Merger until such holder surrenders his certificate or
certificates representing shares of Harbor Common Stock for exchange as provided
in this Article III. If any certificate for shares of CNC Common Stock, or any
check representing cash and/or declared but unpaid dividends, is to be issued in
a name other than that in which a certificate surrendered for exchange is
issued, the certificate so surrendered shall be properly endorsed and otherwise
in proper form for transfer and the person requesting such exchange shall affix
any requisite stock transfer tax stamps to the certificate surrendered or
provide funds for their purchase or establish to the satisfaction of the
Exchange Agent that such taxes are not payable.
(c) AFFILIATES. Certificates surrendered for exchange by any person
constituting an "affiliate" of Harbor for purposes of Rule 144(a) under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), shall not be
exchanged for certificates representing whole shares of CNC Common Stock until
CNC has received a written agreement from such person as provided in Section
6.17.
SECTION 3.2 VOTING AND DIVIDENDS. Former shareholders of record of Harbor
shall be entitled to vote after the Effective Time at any meeting of CNC
shareholders the number of whole shares of CNC Common Stock into which their
respective shares of Harbor Common Stock are converted, regardless of whether
such holders have exchanged their certificates representing Common Stock for
certificates representing CNC Common Stock in accordance with the provisions of
this Agreement. Until surrendered for exchange in accordance with the provisions
of Section 3.1 of this Agreement, each certificate theretofore representing
shares of Common Stock (other than shares to be canceled pursuant to Section
2.1(d)of this Agreement) shall from and after the Effective Time represent for
all purposes only the right to receive shares of CNC Common Stock, cash in lieu
of fractional shares and/or cash, as set forth in this Agreement. No dividends
or other distributions declared or made after the Effective Time with respect to
CNC Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered certificate of Common Stock with respect to the
shares of CNC Common Stock represented thereby, until the holder of such
certificate of Common Stock shall surrender such certificate. Subject to the
effect of applicable laws, following surrender of any such certificates of
Common Stock for which shares of CNC Common Stock are to be issued, there shall
be paid to the holder of the certificates, without interest, (i) the amount of
any cash payable with respect to a fractional share of CNC Common Stock to which
such holder is entitled pursuant to Section 2.1(e) and the amount of dividends
or other distributions with a record date after the Effective Time theretofore
paid with respect to such whole shares of CNC Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole shares of CNC Common
Stock.
SECTION 3.3 NO LIABILITY. Neither CNC, Harbor nor the Exchange Agent shall
be liable to any holder of shares of Common Stock for any shares of CNC Common
Stock (or dividends or distributions
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with respect thereto) or cash delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
SECTION 3.4 WITHHOLDING RIGHTS. CNC or the Exchange Agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Harbor Common Stock such
amounts as CNC or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax law. To the extent that amounts are so withheld by CNC or
the Exchange Agent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the shares of Harbor Common
Stock in respect of which such deduction and withholding was made by CNC or the
Exchange Agent.
ARTICLE IV
CONDUCT PENDING THE MERGER
SECTION 4.1 CONDUCT OF HARBOR'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as expressly provided in this Agreement, or with the prior written
consent of CNC, during the period from the date of this Agreement to the
Effective Time, Harbor shall, and shall cause the Bank to, (a) conduct its
business in the usual, regular and ordinary course, consistent with past
practices and consistent with prudent banking practices; (b) use its
commercially reasonable efforts to maintain and preserve intact its business
organization, employees and advantageous customer relationships and to continue
to develop such customer relationships and retain the services of its key
officers and key employees; (c) maintain and keep its properties in as good
repair and condition as at present except for obsolete properties and for
deterioration due to ordinary wear and tear; (d) use its commercially reasonable
efforts to maintain in full force and effect insurance comparable in amount and
scope of coverage to that now maintained by it; (e) perform in all material
respects all of its obligations under material contracts, leases and documents
relating to and affecting its assets, properties and businesses except such
obligations as it may in good faith reasonably dispute; (f) charge off all loans
receivable and other assets, or portions thereof, deemed uncollectible in
accordance with GAAP, RAP or applicable law or regulation, classified as "loss",
or as directed by its regulators; (g) maintain the ALLL in accordance with past
practices, GAAP and RAP; (h) substantially comply with and perform all material
obligations and duties imposed upon it by all federal and state laws, and rules,
regulations and orders imposed by federal, state and local Governmental
Authorities; and (i) take no action which would reasonably be expected to
adversely affect or delay the ability of CNC, Harbor or the Bank to obtain any
necessary approvals, consents or waivers of any Governmental Authority or other
parties required for the Merger or to perform its covenants or agreements under
this Agreement on a timely basis.
SECTION 4.2 FORBEARANCE BY HARBOR AND ITS SUBSIDIARIES. Except as
expressly provided in this Agreement or as set forth on the Disclosure Schedule,
during the period from the date of this Agreement to the Effective Time, Harbor
shall not, and shall cause Bank and each of its and Bank's Subsidiaries not to,
without the prior written consent of CNC, which consent shall not be
unreasonably withheld:
(a) incur any indebtedness for borrowed money or assume, guaranty, endorse
or otherwise as an accommodation become responsible for the obligations of any
other person, except (i) in connection with banking transactions with banking
customers in the ordinary course of business, or (ii) short-term borrowings (A)
not in excess of the longer of thirty days or until December 31, 1997, (B) in
amounts not greater than $5,000,000 in the aggregate for Harbor and its
Subsidiaries and (C) made at prevailing market rates and terms;
(b) issue any capital stock; adjust, split, combine or reclassify any
capital stock; make, declare or pay any dividend or make any other distribution
on any capital stock; directly or indirectly, redeem, purchase or otherwise
acquire any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock; grant any
stock appreciation rights; grant any person any
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right to acquire any shares of its capital stock (whether pursuant to an option,
warrant, right or otherwise); or issue any additional shares of capital stock;
provided, however, that Harbor may make a cash payment equal to the difference
between the Per Share Cash Consideration and the exercise price of any option
granted pursuant to the Option Plan, issue Harbor Common Stock pursuant to
exercise of an option granted pursuant to the Option Plan, and receive or redeem
shares of Harbor Common Stock pursuant to the exercise of such an option;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of its
properties or assets with a book value of $250,000 or more, or cancel, release
or assign any indebtedness of any person or any claim held by any person, except
pursuant to contracts or agreements in full force and effect at the date of this
Agreement or the sale of OREO or similarly held properties other than at a cash
price of at least 80% of book value of such property at June 30, 1997;
(d) except as permitted under Subsection (k) of this Section 4.2, make any
material investment either by purchase of stock or securities, contributions to
capital, or purchase of any properties or assets of any other person, other than
contributions by Harbor to the capital of the Bank;
(e) enter into or renew any material contract or agreement to a date past
December 31, 1997, terminate any material contract or agreement, or make any
material change in any of its material leases or contracts, other than (i)
entering into deposit agreements or loan agreements or (ii) in the ordinary
course of business consistent with past practice with respect to contracts,
agreements or leases terminable on not more than 90 days notice and involving
payment or payments of not more than $50,000 per annum;
(f) alter its method of establishing interest rates for deposits;
(g) except as required by applicable law or any existing contracts, increase
in any manner the compensation (including, without limitation, bonuses) or
fringe benefits of any of its directors, employees, former employees or
retirees, or pay any pension or retirement allowance, not required by any
existing plan or agreement to any such directors, employees, former employees or
retirees; become a party to, amend or commit to any pension, retirement,
retention, "golden parachute" or other severance (other than in accordance with
Section 6.5(c)), deferred compensation, profit sharing or welfare benefit plan
or agreement or employment agreement with or for the benefit of any employee,
former employee or retiree other than annual salary and bonus increases made in
the ordinary course of business not exceeding 2% in the aggregate (based upon
June 30, 1997 aggregate salary figures) or 6% for any employee; or voluntarily
accelerate the vesting of any employee benefits, except for the acceleration of
the vesting of options granted pursuant to the Option Plan;
(h) settle any claim, action or proceeding involving any liability for
material monetary damages (except to the extent fully reserved against on its
books and records) or enter into any settlement agreement containing material
obligations;
(i) hire additional officers or employees (except that non-officer employees
may be hired to fill vacancies in existing positions), or enter into new
employment arrangements or relationships with new or existing employees which
have the legal effect of any relationship other than at-will employment;
(j) sell any securities, other than securities held as foreclosed
collateral;
(k) purchase any securities other than United States Treasury securities or
United States government agency securities, which in either case have maturities
of three years or less;
(l) engage in speculative trading activities with respect to any securities;
(m) amend its Articles of Incorporation or Bylaws, or change in any material
way its material policies and procedures or make any material changes to its tax
or financial accounting policies (except as to changes to its tax or financial
accounting policies as may be required by GAAP or RAP);
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(n) introduce any new service or products, institute any new advertising
campaign, open, or apply to open or close any branch or facility, or, in
general, change in any material respects its products and services from those in
effect at the date of this Agreement;
(o) (i) renew, extend the maturity of, or materially alter any of the
material terms of, any loan or forbearance agreement for a period of greater
than six months, or (ii) make, acquire a participation in, or reacquire an
interest in a participation sold of, any loan or forbearance agreement, without
regard to the term thereof, which, in the case of (i) or (ii), when aggregated
with all other loans or extensions of credit to, or forbearance agreements with,
such borrower and its related interests, result in total obligations that may be
outstanding following such renewal, extension or reacquisition or for which a
material term may be altered in excess of: (A) if any such loans are rated
"substandard" or below, $125,000, or (B) if all such loans are rated "pass,"
$750,000 for unsecured obligations or $1,000,000 for secured obligations except
for an increase of 10% over the previously existing commitment for such borrower
and related interests;
(p) make, acquire a participation in, or reacquire an interest in a
participation sold of, any loan that is not in compliance with its normal credit
underwriting standards, policies and procedures as in effect on June 30, 1997,
as modified, if necessary, to become or remain in accordance with GAAP or RAP or
in conformity with the recommendations of the Bank's regulators; or renew,
extend the maturity of, or alter any of the material terms of any such loan for
a period of greater than six months;
(q) reallocate or reduce any material accrual or reserve, except for the
reserve reversals listed on the Disclosure Schedule, including, without
limitation, any contingency reserve, litigation reserve, tax reserve, or the
ALLL, by reversal or booking a negative provision, or generally change the
methodology by which such accounts have been handled in past periods, unless
required to do so by GAAP or RAP;
(r) file a 1996 (if not already filed), 1997 or 1998 (short year) income tax
return on Form 1120 with the Internal Revenue Service ("IRS") or any state
taxing agency or authority;
(s) take any action that would reasonably be expected to adversely affect
Harbor's ability to perform its covenants or agreements made herein on a timely
basis;
(t) consummate a foreclosure proceeding with respect to non-residential land
or properties, unless (i) a Phase I environmental report has been obtained and
(ii) CNC consents in writing, which consent shall not be unreasonably withheld;
(u) sell any charged-off loan with a contractual balance of $125,000 or more
or settle any such loan for less than 50% of the amount of the total obligation;
(v) authorize or permit any of its officers, directors, employees or agents
to directly or indirectly solicit, initiate or encourage any inquiries relating
to, or the making of any proposal which constitutes a Takeover Proposal (as
defined below), or recommend or endorse any Takeover Proposal, or participate in
any discussions or negotiations, or provide third parties with any nonpublic
information, relating to any such inquiry or proposal or otherwise facilitate
any effort or attempt to make or implement a Takeover Proposal, PROVIDED,
HOWEVER, that Harbor may, and may authorize and permit its officers, directors,
employees or agents to, provide third parties with nonpublic information,
otherwise facilitate any effort or attempt by any third party to make or
implement a Takeover Proposal, recommend or endorse any Takeover Proposal with
or by any third party, and participate in discussions and negotiations with any
third party relating to any Takeover Proposal, if its Board of Directors, after
having consulted with and considered the advice of counsel, has reasonably
determined in good faith that the failure to do so would cause the members of
its Board of Directors to breach their fiduciary duties under applicable laws.
Harbor will immediately cease and cause to be terminated any activities,
discussions or negotiations conducted prior to the date of this Agreement with
any parties other than CNC with respect to any of the foregoing. Harbor shall
immediately advise CNC following the receipt by it of any Takeover Proposal and
the details thereof, and advise CNC of any developments with respect to such
Takeover Proposal immediately upon the occurrence thereof. As used in this
Agreement, "TAKEOVER PROPOSAL" shall mean, with respect to any
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person, any tender or exchange offer, proposal for a merger, consolidation or
other business combination involving Harbor or any of its Subsidiaries or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, Harbor or any of its Subsidiaries other
than the transactions contemplated or permitted by this Agreement;
(w) take any action that would prevent or impede the Merger from qualifying
as a reorganization with the meaning of Section 368(a) of the Code; and
(x) agree to, or make any commitment to, take any of the actions prohibited
by this Section 4.2.
SECTION 4.3 TIMELINESS OF CNC'S CONSENT. For purposes of Section 4.2, any
consent required from CNC, unless earlier given or denied, shall be deemed to
have been given three Business Days after the time Harbor or the Bank shall have
requested such consent in writing, unless during such three-day period CNC shall
have promptly requested further information in writing reasonably necessary to
allow the decision to be made, in which case such consent, unless earlier given
or denied, shall be deemed to have been given two Business Days after the time
such reasonably requested information has been furnished; provided, however,
with respect to any consent requested pursuant to Section 4.2(o), CNC shall give
or deny such request by the end of the business day following the business day
on which such request was made by Harbor.
SECTION 4.4 CONDUCT BY CNC PRIOR TO THE EFFECTIVE TIME. Except as
expressly provided in this Agreement, during the period from the date of this
Agreement to the Effective Time, CNC shall (a) not take any action which would
reasonably be expected to adversely affect or delay the ability of CNC, Harbor
or the Bank to obtain any necessary approvals, consents or waivers of any
Governmental Authority required for the transactions contemplated by this
Agreement or to perform its covenants or agreements on a timely basis under this
Agreement, (b) amend its Certificate of Incorporation in any respect that
materially and adversely affects the rights and privileges attendant to the CNC
Common Stock, or (c) agree to, or make any commitment to, take any of the
actions prohibited by this Section 4.4.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1 REPRESENTATIONS AND WARRANTIES OF HARBOR AND THE BANK. Harbor
represents and warrants to CNC that, except as set forth in the Disclosure
Schedule;
(a) RECITALS TRUE. The information set forth in the recitals of this
Agreement with respect to Harbor and the Bank is true and correct.
(b) CAPITAL STOCK. Harbor is authorized to issue 5,000,000 shares of
Common Stock, no par value, and is not authorized to issue any other class or
series of capital stock, or any other securities giving the holder thereof the
right to vote on any matters on which shareholders of the Harbor can vote. As of
the date hereof, 1,415,214 shares of Common Stock are issued (of which none were
held as treasury stock and treated as issued but not outstanding), and 113,146
shares are reserved for issuance under the Option Plan. No shares are reserved
for issuance pursuant to any other stock options, restricted stock, stock
appreciation rights, dividend reinvestment or similar plan or plans. All
outstanding shares of capital stock of Harbor are duly authorized, validly
issued and outstanding, fully paid and, nonassessable, and are subject to no
preemptive rights.
(c) AUTHORITY. Each of Harbor and the Bank have the power and authority,
and is duly qualified in all jurisdictions where such qualification is required
(except for such qualifications the absence of which, individually or in the
aggregate, would not have a Material Adverse Effect on Harbor or the Bank), to
carry on its business as it is now being conducted and to own all of its
material properties and assets. Each of Harbor and the Bank has all federal,
state, local and foreign governmental authorizations necessary for it to own or
lease its properties and assets and to carry on its business as it is now being
conducted, except
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for such powers and authorizations the absence of which, either individually or
in the aggregate, would not have a Material Adverse Effect on Harbor or the
Bank.
(d) SUBSIDIARIES. Harbor has no Subsidiaries, other than the Bank and
Harbor Bank Properties, a California corporation, each of which is a
wholly-owned subsidiary of Harbor. The Bank has one subsidiary, H.B. Fundings, a
California corporation. Harbor does not own, directly or indirectly, any equity
portion or voting interest in any corporation, partnership or other entity,
except as received in satisfaction of a debt previously contracted in good
faith.
(e) APPROVALS. The execution by Harbor of this Agreement has been
authorized by all necessary corporate action, including, but not limited to, a
vote by its board of directors (which approval includes a resolution
recommending that this Agreement and the Merger be approved by the shareholders
of Harbor) subject to adoption of this Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of Harbor as required under the
CGCL. Subject to shareholder approval and to receipt of required approvals,
consents or waivers of Governmental Authorities referred to in Section 7.1 (b),
this Agreement is a valid and binding agreement of Harbor, enforceable against
it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights, general equitable principles, and
the rights of the Federal Deposit Insurance Corporation ("FDIC").
(f) NO VIOLATIONS. The execution, delivery and performance of this
Agreement by Harbor does not, and the consummation of the Merger will not,
constitute (i) a breach or violation of, or a default under any applicable law,
rule or regulation or any material judgment, decree, order, governmental permit
or license, or material indenture, agreement or instrument of Harbor, or to
which it (or any of its respective properties) is subject, which breach,
violation or default would have a Material Adverse Effect on Harbor or would
materially hinder or delay the Merger, or (ii) a breach or violation of, or a
default under, its Articles of Incorporation or Bylaws; and the consummation of
the Merger will not require any approval, consent or waiver under any such law,
any rule, regulation, judgment, decree, order, governmental permit or license or
the approval, consent or waiver of any other party to any such agreement,
indenture or instrument, other than (A) the shareholder approval referred to in
Section 7.1(a), (B) the required approvals, consents and waivers of Governmental
Authorities referred to in Section 7.1(b), (C) the approvals, consents or
waivers as are required under the federal and state securities or Blue Sky laws,
(D) any other material approvals or consents or waivers of third parties as set
forth in the Disclosure Schedule, and (E) any other approvals, consents or
waivers the absence of which, individually or in the aggregate, would not result
in a Material Adverse Effect on Harbor or would not materially hinder or delay
the Merger.
(g) COMMUNITY REINVESTMENT ACT. The Bank received a rating of
"outstanding" in its most recent examination or interim review with respect to
the Community Reinvestment Act. Harbor has not been advised of any supervisory
or compliance concerns regarding the Bank's compliance with the Community
Reinvestment Act.
(h) REPORTS. Harbor and the Bank have timely filed all material reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that it was required to file since January 1, 1992 with
(i) the Board of Governors, (ii) the California Department of Banking or
Department of Financial Institutions (iii) the Securities and Exchange
Commission (the "SEC"), and (iv) the FDIC (collectively "GOVERNMENTAL
AUTHORITIES") and have paid all fees and assessments due and payable in
connection therewith. Except for normal examinations conducted by a Governmental
Authority in the regular course of the business of Harbor and the Bank, or as
set forth in the Disclosure Schedule, (x) no Governmental Authority has
initiated any proceeding or, to the best knowledge of Harbor, investigation,
into the business or operations of Harbor or either of the Bank since January 1,
1992 and (y) neither Harbor nor the Bank is a party to any cease and desist
order, written agreement, memorandum of understanding or any similar regulatory
action or order with any Federal or state governmental
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authorities, nor a recipient of any extraordinary supervisory letter from, nor
has it adopted any board resolution at the request of, any of its regulators,
nor been advised that any such issuance or request is contemplated. Except as
set forth in the Disclosure Schedule, there is no material unresolved violation,
criticism or exception by any Governmental Authority with respect to any report
or statement relating to any examinations of Harbor by any Governmental
Authority with respect to any report or statement relating to any examinations
of Harbor or the Bank. The deposits of the Bank are insured by the FDIC in
accordance with the Federal Deposit Insurance Act, up to applicable limits.
(i) FINANCIAL STATEMENTS. As of their respective dates, none of Harbor's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996 (the
"1996 10-KSB") or Quarterly Report on Form 10-QSB for the quarter ended March
31, 1997 (the "10-QSB"), or Registration Statement on Form 10-SB filed as of
June 30, 1997 (the "FORM 10-SB"), nor any other document filed subsequent to
December 31, 1996 under Section 13(a), 13(d), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), each in the form
(including exhibits) filed with the SEC (collectively, the "HARBOR REPORTS"),
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Each of the balance sheets or statements of condition contained or
incorporated by reference in the Harbor Reports (including any related notes and
schedules) fairly present the financial position of the entity or entities to
which it relates as of its date and each of the statements of operations and
retained earnings and of cash flows or equivalent statements contained or
incorporated by reference in the Harbor Reports (including any related notes and
schedules) fairly present the results of operations, retained earnings and cash
flows, as the case may be, of the entity or entities to which it relates for the
periods set forth therein (subject, in the case of unaudited interim statements,
to normal year-end audit adjustments that are not material in amount or effect),
in each case in accordance with the published rules and regulations of the SEC
and GAAP, except as may be noted therein. The books and records of Harbor and
its Subsidiaries have been, and are being, maintained in all material respects
in accordance with GAAP and RAP and other applicable legal and accounting
requirements and reflect only actual transactions.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
10-QSB or the Form 10-SB, since December 31, 1996, there have not been (i) any
changes in the business, assets, financial condition or results of operations of
Harbor and its Subsidiaries that, individually or in the aggregate, have had a
Material Adverse Effect on Harbor and its Subsidiaries; (ii) any amendments to
the Articles of Incorporation or Bylaws of Harbor; (iii) any declarations,
setting aside or payment of any dividend or any other distribution in respect of
the capital stock of Harbor; or (iv) any changes by Harbor in accounting
principles or methods or tax methods, except as required or permitted by, the
Financial Accounting Standards Board or by any Governmental Authorities having
jurisdiction over the Bank.
(k) TAXES. Except as prohibited by Section 4.2(R), Harbor and each of its
Subsidiaries has, or will have, timely filed all Tax Returns required to have
been filed prior to the Effective Time (taking into account valid extensions),
and all such returns and reports are correct and complete in all material
respects. Harbor has delivered or made available to CNC true and complete copies
of all such Tax Returns for 1993, 1994 and 1995, when available, will deliver to
CNC true and complete copies of such Tax Returns for 1996. The Disclosure
Schedule sets forth those California Tax Returns and Federal Tax Returns that
have been audited, those Tax Returns that currently are the subject of audit,
and those Tax Returns for which the statute of limitations for the assessment of
Taxes has not run. All Taxes (including, but not limited to, any interest,
penalty or addition thereto) due, or required to be withheld and paid over as of
the date hereof as shown on such returns have been paid. To Harbor's knowledge,
neither Harbor nor any of its Subsidiaries has requested any extension of time
within which to file a return or report that has not since been timely filed. No
deficiency in any Taxes, assessments or governmental charges have been proposed,
asserted or assessed against Harbor or any of its Subsidiaries that has not been
settled and paid. Except as set forth in the Disclosure Schedule, no waiver of
time to assess any Taxes is in effect and no
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request for such waiver is pending. Harbor has not undergone an ownership change
within the meaning of Section 382 of the Code. To Harbor's knowledge, neither
Harbor nor any of its Subsidiaries has any liability for Taxes, including
employment taxes, of any person under Treasury Regulation Section 1.1502-6, as a
transferee or successor, or otherwise. Except as set forth in the Disclosure
Schedule, neither Harbor nor any of its Subsidiaries has made, or is obligated
to make, or is a party to any agreement that could reasonably be expected to
obligate it to make, any payments that are not deductible pursuant to Code
Section 280G. Neither Harbor nor any of its Subsidiaries is a dealer within the
meaning of Code Section 475 and the applicable Treasury Regulations.
(l) ABSENCE OF CLAIMS; LITIGATION. No legal, administrative, arbitration
or other proceedings, claims, actions or governmental or regulatory
investigations of any nature are pending or to its knowledge, threatened against
Harbor or the Bank which are reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Harbor or to materially hinder
or delay consummation of the Merger. Neither Harbor nor the Bank is in default
with respect to any material judgment, order, writ, injunction, decree,
regulatory restriction or award of any court, arbitrator or governmental agency,
authority or instrumentality. The Disclosure Schedule contains a complete
listing of litigation pending or, to Harbor's knowledge, threatened against
Harbor or the Bank as of July 31, 1997, to which Harbor is a party and which
names Harbor as a defendant or cross-defendant and the amount reserved for
litigation matters in the aggregate.
(m) REGULATORY ACTIONS. As of the date hereof and to Harbor's actual
knowledge, neither Harbor nor the Bank is the subject of a referral to either
the United States Department of Justice or the Department of Housing and Urban
Development for alleged violations of the Fair Lending Acts. Except as set forth
in the Disclosure Schedule, to the knowledge of Harbor, each material violation,
criticism, or exception by any governmental authority with respect to any
examinations of Harbor or the Bank has been resolved or is in the process of
resolution.
(n) CERTAIN AGREEMENTS. Neither Harbor nor the Bank is a party to an oral
or written (i) consultant agreement, not terminable on 60 days' or less notice
or involving the payment of more than $50,000 per annum, (ii) agreement with any
executive officer or other key employee, the benefits of which are contingent,
or the terms of which are materially altered, upon the occurrence of a
transaction involving it of the nature contemplated by this Agreement, (iii)
agreement with or with respect to any executive officer providing any term of
employment or compensation guarantee extending for a period longer than six
months, or (iv) agreement or plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of the Merger or the value of any of the benefits of which will be
calculated on the basis of the Merger. CNC has been provided with a complete and
accurate listing of the names and current annual salary rates of all persons
employed by Harbor and each of its Subsidiaries, showing for each such person
the amounts paid or payable as salary, bonus payments and any indirect
compensation for the year ended December 31, 1996, the current pay rate as of
June 30, 1997, the names of all of the directors and officers of Harbor and each
of its Subsidiaries, and the names of all persons, if any, holding tax or other
powers of attorney for the Harbor and each of its Subsidiaries.
(o) LABOR MATTERS. Neither Harbor nor any of its Subsidiaries, is party
to, or is bound by, any collective bargaining agreement, contract, or other
agreement or understanding with a labor organization, nor is any of them the
subject of any proceeding asserting that it has committed an unfair labor
practice or seeking to compel it to bargain with any labor organization as to
wages and conditions of employment, nor is there any strike or labor dispute
involving Harbor or any of its Subsidiaries. Harbor considers its employee
relations and those of each of its Subsidiaries to be satisfactory.
(p) EMPLOYEE BENEFIT PLANS. A list of all Employee Plans (as hereinafter
defined) is set forth in the Disclosure Schedule. Harbor has delivered or made
available to CNC true and complete copies of the following documents, as they
may have been amended to the date hereof, embodying or relating to Employee
Plans: Each of the Employee Plans, including all amendments thereto, any related
trust
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agreements, insurance policies or any funding agreements; the most recent
determination letter from the IRS with respect to each of the Employee Plans;
the actuarial evaluation, if any, for the most recent plan year prepared for
each of the Employee Plans; the current summary plan description of each of the
Employee Plans; and the most recent annual return/report on IRS Forms 5500,
5500-C or 5500-R for each of the Employee Plans for which such report was
prepared.
Except as set forth in the Disclosure Schedule:
(i) the written terms of each of the Employee Plans and, if controlled
by Harbor or any of its Subsidiaries, any related trust agreement, group
annuity contract, insurance policy or other agreement, have been
administered in substantial compliance with the applicable requirements of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code;
(ii) each of the Employee Plans for which Harbor has claimed a deduction
under Code Section 404, as if such Employee Plan were qualified under Code
Section 401(a), has received a favorable determination letter from the IRS
as to the tax qualification of such Employee Plan, and to the knowledge of
Harbor such favorable determination has not been modified, revoked or
limited by failure to satisfy any condition thereof or by a subsequent
amendment to, or failure to amend, such Employee Plan;
(iii) to Harbor's knowledge, neither Harbor nor any of its Subsidiaries,
nor any other "disqualified person" or "party in interest" (as defined in
Code Section 4975 and Section 3(14) of ERISA, respectively) with respect to
an Employee Plan has engaged in any "prohibited transaction" (as defined in
Code Section 4975 or Sections 406 or 407 of ERISA) that could reasonably be
expected to subject Harbor or any of its Subsidiaries to any material tax,
penalty or liability under Code Section 4975 or Title I of ERISA;
(iv) no Employee Plan is a Multiple Employer Plan within the meaning of
Code Section 413 or a Multiemployer Plan within the meaning of Section 3(37)
of ERISA;
(v) neither Harbor nor any of its Subsidiaries has incurred, or has any
knowledge of, any pending material tax, penalty or liability under Code
Section 4972 with respect to any Employee Plan;
(vi) continuation health care coverage requirements and notice
requirements under Code Section 4980B and Sections 601 through 608 of ERISA
have been satisfied in all material respects with respect to all current or
prior employees of Harbor and any Subsidiaries and any "qualified
beneficiary" of any such employees (within the meaning of Code Section
4980B(g)); and
(vii) no Employee Plan provides for retiree medical benefits.
For purposes hereof, the term "Employee Plan" means any "employee benefit
plan" (as defined in Section 3(3) of ERISA) as well as any other material
written or formal plan or contract involving direct or indirect compensation
under which Harbor or any Subsidiary has any present or future obligations or
liability on behalf of its employees or former employees or their dependents or
beneficiaries, including, but not limited to, each retirement, employee stock
ownership, cash or deferred, each other deferred or incentive compensation,
bonus, stock option, employee stock purchase, "phantom" stock or stock
appreciation right plan, each other program providing payment or reimbursement
for or of medical, dental or visual care, counselling, or vacation, sick,
disability or severance pay and each other "fringe benefit" plan or arrangement.
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(q) INSIDER LOANS; OTHER TRANSACTIONS. Harbor has previously provided CNC
with a listing, current as of June 30, 1997, of all extensions of credit made to
Harbor and each of its Subsidiaries and each of its and their executive officers
and directors and their related interests (all as defined under Federal Reserve
Board Regulation "O"), all of which have been made in compliance with Regulation
O, which listing is true, correct and complete in all material respects. Neither
Harbor nor any Subsidiary owes any amount to, or has any contract or lease with
or commitment to, any of the present executive officers or directors of Harbor
or any Subsidiary (other than for compensation for current services not yet due
and payable, and reimbursement of expenses arising in the ordinary course of
business).
(r) TITLE TO ASSETS. Harbor and each of its Subsidiaries has good and
marketable title to all of its material properties and assets (other than (i)
property as to which it is lessee and (ii) real estate owned as a result of
foreclosure, transfer in lieu of foreclosure or other transfer in satisfaction
of a debtor's obligation previously contracted), including, without limitation,
all personal and intangible properties reflected in the audited financial
statements included in the 1996 10-KSB, the 10-QSB, or the Form 10-SB, or
acquired subsequently thereto, subject to no liens, mortgages, security
interests, encumbrances or charges of any kind except (1) as noted in the
audited financial statements included in the 1996 10-KSB, the 10-QSB or the Form
10-SB, or as set forth in the Disclosure Schedule, (2) statutory liens not yet
delinquent which are being contested in good faith by appropriate proceedings,
and liens for Taxes not yet due, (3) pledges of assets in the ordinary course of
business to secure public deposits, (4) for those assets and properties disposed
of for fair value in the ordinary course of business since the date of the 1996
10-KSB, the 10-QSB or the Form 10-SB, (5) defects and irregularities of title
and encumbrances that do not materially impair the use thereof for the purpose
for which they are held, and (6) any other liens, mortgages, security interests,
encumbrances or charges of any kind, which individually do not exceed $50,000 in
amount. Without limiting the above, Harbor and each of its Subsidiaries owns or
possesses valid and binding licenses and other rights to itself use without
payment all material patents, copyrights, trade secrets, trade names, service
marks, logos and trademarks used in its business, and none of them has received
any notice of conflicts with respect thereto that asserts the rights of others.
(s) KNOWLEDGE AS TO CONDITIONS. Harbor and each of its Subsidiaries knows
of no reason why the approvals, consents and waivers of Governmental Authorities
referred to in Section 7.1 (b) should not be obtained without the imposition of
any condition of the type referred to in the provisos thereto.
(t) COMPLIANCE WITH LAWS. Neither Harbor nor any of its Subsidiaries is in
material violation in respect of any federal, state or local laws, rules,
regulations or orders applicable to it or by which its properties may be bound,
except such violations as would not have a Material Adverse Effect on Harbor.
Without limiting the scope of the previous sentence, Harbor and each of its
Subsidiaries is not in material violation of Regulations B, D, E, Z or DD
adopted by the Board of Governors; the Equal Credit Act (15 U.S.C. Section 1691,
ET SEQ.), the Fair Housing Act (420 U.S.C. Section 3601, ET SEQ.), the Bank
Secrecy Act (31 U.S.C. Section 5322, ET SEQ.), the Home Mortgage Disclosure Act
(12 U.S.C. 2801, ET SEQ.) (collectively, the "FAIR LENDING ACTS"), or those
provisions of the United States Code providing penalties for the laundering of
monetary instruments (18 U.S.C. Section 1956) or engaging in monetary
transactions in property derived from specified unlawful activity (18 U.S.C.
Section 1957).
(u) FEES. Other than financial advisory services performed for Harbor by
Hoefer & Arnett, Inc., neither Harbor nor any of its Subsidiaries nor any of its
or their officers, directors, employees or agents, has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or finder's fees in connection with this Agreement or the
transactions contemplated hereby.
(v) ENVIRONMENTAL.
(i) To Harbor's knowledge, all of the properties and operations of
Harbor and each of its Subsidiaries are in compliance in all material
respects with all material Environmental Laws (as defined below) applicable
to such properties and operations.
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(ii) To Harbor's knowledge, Harbor and each of its Subsidiaries has
obtained all material permits, licenses, and authorizations which are
required for Harbor's operations under Environmental Laws.
(iii) Except as set forth in the Disclosure Schedule, to Harbor's
knowledge, no Hazardous Substances (as defined below) exist on, about, or
within or have been used, generated, stored, transported, disposed of on, or
released from, any of the properties of Harbor or any of its Subsidiaries
except in accordance in all material respects with Environmental Laws.
Neither Harbor nor any of its Subsidiaries has any actual knowledge that any
prior owners, occupants or operators of any such property or any other
property in which it has a security interest, ever deposited, disposed of,
or allowed to be deposited or disposed of, in, on, or under or handled or
processed on, or released, emitted or discharged from, such properties any
Hazardous Materials except in accordance in all material respects with
Environmental Laws, or that any prior or present owners, occupants or
operators of any properties in which it holds a security interest, mortgage
or other lien or interest, deposited or disposed of, in, on or under or
handled and/or processed on, or released, emitted or discharged from, such
properties any Hazardous Material except in accordance in all material
respects with Environmental Laws. The use which Harbor and each of its
Subsidiaries has made, makes and intends to make of its properties will not
result in the use, generation, storage, transportation, accumulation,
disposal or release of any Hazardous Substance on, in, or from any of such
properties except in accordance in all material respects with applicable
Environmental Laws.
(iv) There is no action, suit, proceeding, investigation, or inquiry
before any court, administrative agency or other governmental authority
pending, or, to the knowledge of Harbor or any of its Subsidiaries,
threatened against Harbor or any of its Subsidiaries relating in any way to
any material violation of any applicable Environmental Law. To the knowledge
of Harbor, none of Harbor or its Subsidiaries has any material liability for
remedial action with respect to a violation of an Environmental Law, nor has
it received any written requests for information relating to any material
violations of any Environmental Law from any governmental authority with
respect to the condition, use, or operation of any of its properties nor has
any of them received any notice from any governmental authority or any
written notice from any other person with respect to any material violation
of or material liability for any remedial action under any Environmental
Law.
(v) As used in this Section, the term "Environmental Law" means any and
all Federal, state and local laws, regulations, and requirements pertaining
to health, safety and the environment, including, without limitation, the
Comprehensive Environmental Response Compensation and Liability Act of 1980,
42 U.S.C. Section 9601, ET SEQ. ("CERCLA"), the Resource Conservation and
Recovery Act of 1975, 42 U.S.C. Section 6901, ET SEQ. ("RCRA"), the
Occupational Safety and Health Act, 29 U.S.C. Section 651, ET SEQ. (as it
relates to the use of, or exposure to, Hazardous Substances), the Clean Air
Act, 42 U.S.C. Section 7401, ET SEQ., the Clean Water Act, 33 U.S.C. Section
1251, ET SEQ., the Toxic Substance Control Act, 15 U.S.C. Section 2601, ET
SEQ., the Carpenter-Presley-Tanner Hazardous Substance Account Act, as
amended, Chapter 6.8 of the California Health and Safety Code, Section
25300, ET SEQ., and the Hazardous Waste Control Law, Chapter 6.5 of the
California Health and Safety Code, Section 25100, ET SEQ. (the latter two
statutes being referred to herein as the State Acts), and any and all
regulations promulgated thereunder, and all similar laws, regulations, and
requirements of any governmental authority, agency having jurisdiction over
the environmental activities of Harbor or any of its Subsidiaries, or of its
or their properties, as such laws, regulations, and requirements may be in
effect on the date hereof.
(vi) As used in this Section, the term "properties" shall include: all
real estate property now or previously owned or leased by Harbor and each of
its Subsidiaries, property as to which Harbor or any of its Subsidiaries
holds any security interest, deed of trust, mortgage or other lien, and any
property to which Harbor or any of its Subsidiaries could be deemed an
"owner" or "operator" under any applicable Environmental Law.
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(vii) As used in this Section, the term "Hazardous Substance" shall mean
(1) any "hazardous waste" as defined by CERCLA and the State Acts, as such
acts are in effect on the date hereof, and any and all regulations
promulgated thereunder; (2) any "hazardous substance" as such term is
defined by CERCLA; (3) any "regulated substance" as defined by the State
Acts; (4) asbestos requiring abatement, removal or encapsulation pursuant to
the requirements of governmental authorities; (5) polychlorinated biphenyls;
(6) petroleum products; (7) "hazardous chemicals" or "extremely hazardous
substances" in quantities sufficient to require reporting, registration,
notification and/or optional treatment or handling under the Emergency
Planning and Community Right to Know Act of 1986; (8) any "hazardous
chemical" in levels that would result in exposure greater than is allowed by
permissible exposure limits established pursuant to the Occupational Safety
and Health Act of 1970; (9) any substance that requires reporting,
registration, notification, removal, abatement and/or special treatment,
storage, handling or disposal, under Section Section 6, 7 and 8 of the Toxic
Substance Control Act (15 U.S.C. Section 2601); (10) any toxic or hazardous
chemical described in 29 C.F.R. 1910.1000-1047 in levels that would result
in exposure greater than those allowed by the permissible exposure limits
pursuant to such regulations; and (11) any (A) "hazardous waste", (B) "solid
waste" capable of causing a "release or threatened release" that present an
"imminent and substantial endangerment" to the public health and safety of
the environment, (C) "solid waste" that is capable of causing a "hazardous
substance incident" (D) "solid waste" with respect to which special
requirements are imposed by applicable governmental authorities upon the
generation, transportation thereof as such terms are defined and used within
the meaning of the State Acts or (E) any "pollutant" or "toxic pollutant" as
such term is defined in the Federal Clean Water Act, 33 U.S.C. Section
Section 1251-1376, as amended, by Public Law 100-4, February 4, 1987, and
the regulations promulgated thereunder, including 40 C.F.R. Section Section
122.1 and 122.26.
(w) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The ALLL for the Bank is adequate
in accordance with GAAP and RAP.
(x) PERFORMANCE OF OBLIGATIONS. Harbor and each of its Subsidiaries has
performed in all material respects all of the obligations required to be
performed by it to date, and is not in default under, or in breach of, any term
or provision of any material contract, lease, indenture or any other material
agreement to which it is a party, is subject or is otherwise bound and no event
has occurred that, with the giving of notice or the passage of time, or both,
would constitute such default or breach. The Disclosure Schedule contains a list
of all contracts to which Harbor and each of its Subsidiaries is a party, except
for contracts terminable without penalty on not more than 60 days' notice and
involving the payment of not more than $25,000 per annum, deposit agreements and
loan agreements. The Disclosure Schedule indicates the termination date for each
such contract and the termination payment required, if any.
(y) INSURANCE. Harbor and each of its Subsidiaries has in effect policies
of insurance with respect to its assets and business against such casualties and
contingencies and in such types and forms as in the judgment of its management
are appropriate for its business, operations, properties and assets. Harbor has
made available to CNC, copies of all policies of insurance and bonds carried and
owned by Harbor or any of its Subsidiaries as of the date hereof, which copies
are complete and accurate in all material respects, and which are listed in the
Disclosure Schedule. Neither Harbor nor any of its Subsidiaries is in default
under any such policy of insurance or bond such that it is reasonably likely to
be cancelled. No notice of cancellation or material amendments has been received
with respect to existing material policies and no coverage thereunder with
respect to any material claims is being disputed.
(z) LISTING OF LOANS. Copies, in writing, have been made available to CNC
of the detailed listing of all loans and notes receivable of Harbor and each of
its Subsidiaries as of June 30, 1997, including participations, with the
outstanding principal balance of each such loan and note receivable, and the
past due status of any loan or note receivable, and such copies reflect
correctly the detail of trial balance totals in all material respects as of the
date of such reports.
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(aa) DERIVATIVE TRANSACTIONS. Neither Harbor nor any of its Subsidiaries
is a party to a transaction in or involving forwards, futures, options on
futures, swaps or other derivative instruments.
(bb) TRUST ADMINISTRATION. Neither Harbor nor any Subsidiary presently
exercises trust powers, including, but not limited to, trust administration, and
has not exercised such trust powers for a period of at least 3 years prior to
the date hereof. The term "trusts" as used in this Subsection 5.1(bb) includes
(i) any and all common law or other trusts between an individual, corporation or
other entities and Harbor or any of its Subsidiaries, as trustee or co-trustee,
including, without limitation, pension or other qualified or nonqualified
employee benefit plans, compensation, testamentary, INTER VIVOS, and charitable
trust indentures; (ii) any and all decedents' estates where Harbor or any of its
Subsidiaries is serving or has served as a co-executor or sole executor,
personal representative or administrator, administrator DE BONIS NON,
administrator DE BONIS NON with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where Harbor or any of its Subsidiaries is serving or has served as a co-grantor
or a sole grantor or a conservator or a co-conservator of the estate, or any
similar fiduciary capacity, and (iv) any and all agency and/or custodial
accounts and/or similar arrangements, including plan administrator for employee
benefit accounts, under which Harbor or any of its Subsidiaries is serving or
has served as an agent or custodian for the owner or other party establishing
the account with or without investment authority.
(cc) CONTINGENT LIABILITIES. Harbor has no knowledge of any contingent
liabilities of Harbor or any of its subsidiaries, which could be material to
Harbor, other than those reflected in the financial statements included in the
Harbor Reports or the contracts, litigation and other matters listed in the
Disclosure Schedule, whether or not disclosure or accrual is required pursuant
to GAAP.
(dd) STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by Harbor for inclusion in the S-4 (as defined in Section 6.1(a)) or
the Proxy Statement/Prospectus (as defined in Section 6.1(a)), or incorporated
by reference therein, or any other document to be filed with any governmental
agency or regulatory authority in connection with the transactions contemplated
hereby will, in the case of the Proxy Statement/Prospectus, when it is first
mailed to the shareholders of Harbor, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading or, in the case of the S-4, when it becomes
effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting of shareholders of Harbor, be
false or misleading with respect to any material fact or omit to state any
material fact necessary to correct any statement or remedy any omission in any
earlier communication with respect to the solicitation of any proxy of the
Harbor shareholders' meeting.
(ee) ACCURATE DISCLOSURE. Harbor agrees that through the Effective Time of
the Merger, each of its reports, and other filings required to be filed with any
applicable Governmental Authority will comply in all material respects with all
of the applicable statutes, rules and regulations enforced or promulgated by the
Governmental Authority with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of Harbor and/or any of its Subsidiaries will
fairly present the financial position of such entities or entity and will be
prepared in accordance with generally accepted accounting principles or
applicable banking regulations consistently applied during the periods involved.
Notwithstanding anything to the contrary set forth in this Section 5.1(ee),
Harbor makes no representation or warranty with respect to any information
supplied by CNC or CNB or any of CNC's Reports.
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(ff) TAX REPRESENTATION. Each of Harbor and the Bank operates at least one
significant historic business line, or owns at least a significant portion of
its historic business assets, in each case within the meaning of Treasury
Regulation Section 1.368-1(d).
SECTION 5.2 REPRESENTATIONS AND WARRANTIES OF CNC. CNC represents and
warrants to Harbor that:
(a) RECITALS TRUE. The information set forth in the recitals of this
Agreement with respect to CNC are true and correct.
(b) CAPITAL STOCK. CNC is authorized to issue 75,000,000 shares of Common
Stock, $1.00 par value, and is not authorized to issue any other class or series
of capital stock, or any other securities giving the holder thereof the right to
vote on any matters on which shareholders of CNC can vote. As of July 31, 1997,
46,700,891 shares of CNC Common Stock were issued and outstanding, and 572,608
shares are held as treasury stock. All outstanding shares of CNC Common Stock
outstanding are and all shares to be issued pursuant to the Merger will be, duly
authorized, validly issued, fully paid and nonassessable, and are not, or will
not be, subject to no preemptive rights. CNC has provided Harbor with true and
correct copies of its Certificate of Incorporation and Bylaws.
(c) AUTHORITY. CNC has the power and authority, and is duly qualified in
all jurisdictions where such qualification is required (except for such
qualifications the absence of which, individually or in the aggregate, would not
have a Material Adverse Effect on CNC), to carry on its business as it is now
being conducted and to own all of its material properties and assets. CNC has
all federal, state, local and foreign governmental authorizations necessary for
it to own or lease its properties and assets and to carry on its business as it
is now being conducted, except for such powers and authorizations the absence of
which, either individually or in the aggregate, would not have a Material
Adverse Effect on CNC.
(d) APPROVALS. The execution by CNC of this Agreement has been authorized
by all necessary corporate actions of CNC, including, but not limited to, a vote
by its board of directors. No vote, consent or approval of the shareholder of
CNC or the shareholders of CNC is required to authorize this Agreement or the
consummation of the Merger. Subject to receipt of the required approvals,
consents or waivers of Governmental Authorities referred to in Section 7.1(b),
this Agreement is a valid and binding agreement of CNC enforceable against CNC
in accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditor's rights, general equity principles, and the
rights of the FDIC.
(e) NO VIOLATIONS. The execution, delivery and performance of this
Agreement by CNC does not, and consummation of the Merger will not, constitute
(i) a breach or violation of, or a default under, any applicable law, rule or
regulation or any material judgment, decree, order, governmental permit or
license, or material indenture, agreement or instrument of CNC, or to which CNC
(or its property) is subject, which breach, violation or default would have a
Material Adverse Effect on CNC or would materially hinder or delay the Merger or
(ii) a breach or violation of, or a default under, the Certificate of
Incorporation or Bylaws of CNC; and the consummation of the Merger will not
require any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval, consent
or waiver of any other party to any such agreement, indenture or instrument,
other than (1) the required approvals, consents and waivers of Governmental
Authorities referred to in Section 7.1 (b); and (2) any other approvals,
consents or waivers, the absence of which, individually or in the aggregate,
would not result in a Material Adverse Effect on CNC or would not materially
hinder or delay the Merger.
(f) FINANCIAL STATEMENTS. As of their respective dates, none of CNC's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 or
Quarterly Report on Form 10-Q for the quarters ended March 31, 1997 and June 30,
1997, nor any other document filed subsequent to December 31, 1994 under Section
13(a), 13(d), 14 or 15(d) of the Exchange Act, each in the form (including
exhibits) filed with the
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SEC (collectively, the "CNC REPORTS"), contained or will contain any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. Each of the balance
sheets or statements of condition contained or incorporated by reference in the
CNC Reports (including any related notes and schedules) fairly present the
financial position of the entity or entities to which it relates as of its date
and each of the statements of operations and retained earnings and of cash flows
or equivalent statements contained or incorporated by reference in the CNC
Reports (including any related notes and schedules) fairly present the results
of operations, retained earnings and cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments that are not Material in amount or effect), in each case in
accordance with the published rules and regulations of the SEC and GAAP
consistently applied and applicable to bank holding companies during the periods
involved, except as may be noted therein. The books and records of CNC have
been, and are being maintained in all material respects in accordance with GAAP
and RAP and other applicable legal and accounting requirements and reflect only
actual transactions.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in CNC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, since
December 31, 1996, there have not been any changes in the business, assets,
financial condition or results of operations of CNC and its Subsidiaries that,
individually or in the aggregate, have had a Material Adverse Effect on CNC.
(h) ABSENCE OF CLAIMS. No litigation, proceeding or controversy before any
court or governmental agency or authority is pending against CNC or its
Subsidiaries which is reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on CNC or to materially hinder or delay
consummation of the Merger, and, to its knowledge, no such litigation,
proceeding, controversy, claim or action has been threatened.
(i) REGULATORY ACTIONS. Neither CNC nor CNB is a party to any cease and
desist order, written agreement, memorandum of understanding or any similar
regulatory action or order with any Federal or state governmental authorities,
nor a recipient of any extraordinary supervisory letter from, nor has it adopted
any board resolution at the request of any of its regulators, nor been advised
that any such issuance or request is contemplated. As of the date hereof, and to
CNC's actual knowledge, CNC is not the subject of a referral to either the
United States Department of Justice or the Department of Housing and Urban
Development for alleged violations of the Fair Lending Acts. Each material
violation, criticism, or exception by any governmental authority with respect to
any examinations of CNC has been resolved or is in the process of resolution.
(j) KNOWLEDGE AS TO CONDITIONS. CNC knows of no reason why the approvals,
consents and waivers of Governmental Authorities referred to in Section 7.1(b)
should not be obtained without the imposition of any condition of the type
referred to in the provisos thereto.
(k) COMPLIANCE WITH LAWS. CNC and its Subsidiaries are not in material
violation in any respect of any material Federal, state or local laws, rules,
regulations or orders applicable to them or by which their properties may be
bound, except such violations as would not have a Material Adverse Effect on
CNC. Without limiting the scope of the previous sentence, neither CNC nor CNB is
in material violation of Regulations B, D, E, Z or DD adopted by the FRB, the
Fair Lending Acts, or those provisions of the United States Code providing
penalties for the laundering of monetary instruments (18 U.S.C. Section 1956) or
engaging in monetary transactions in property derived from specified unlawful
activity (18 U.S.C. Section 1957).
(l) FEES. Neither CNC, nor any of its officers, directors, employees or
agents, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees in
connection with this Agreement or the transactions contemplated hereby.
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(m) COMMUNITY REINVESTMENT ACT. CNB received a rating of "satisfactory" in
its most recent examination or interim review with respect to the Community
Reinvestment Act. CNC has not been advised of any supervisory concerns regarding
CNB's compliance with the Community Reinvestment Act.
(n) STATEMENTS TRUE AND CORRECT. None of the information supplied or to be
supplied by CNC for inclusion in the S-4 (as defined in Section 6.1(a)) or the
Proxy Statement/Prospectus, or incorporated by reference therein, or any other
document to be filed with any governmental agency or regulatory authority in
connection with the transactions contemplated hereby will, in the case of the
Proxy Statement/ Prospectus (or incorporated by reference therein), when it is
first mailed to the shareholders of Harbor, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading or, in the case of the S-4, when it becomes
effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading, or, in the case of the Proxy Statement/Prospectus or any amendment
thereof or supplement thereto, at the time of the meeting of shareholders of
Harbor, be false or misleading with respect to any material fact or omit to
state any material fact necessary to correct any statement or remedy any
omission in any earlier communication with respect to the solicitation of any
proxy of the Harbor shareholders' meeting.
(o) ACCURATE DISCLOSURE. CNC agrees that through the Effective Time of the
Merger, each of its reports, and other filings required to be filed with any
applicable Governmental Authority will comply in all material respects with all
of the applicable statutes, rules and regulations enforced or promulgated by the
Governmental Authority with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any such report, or other filing that is intended to
present the financial position of CNC and its Subsidiaries will fairly present
the financial position of CNC and its Subsidiaries, will be prepared in
accordance with generally accepted accounting principles or applicable banking
regulations consistently applied during the periods involved. Notwithstanding
anything to the contrary set forth in this Section 5.2(o), CNC makes no
representation or warranty with respect to any information supplied by Harbor or
Harbor's Subsidiaries (or any of the Harbor Reports).
(p) TAX REPRESENTATION. It is the present intention of CNC to continue at
least one significant historic business line of each of Harbor and the Bank or
to use at least a significant portion of each of Harbor's and the Bank's
historic business assets in a business, in each case within the remaining of
Treasury Regulation Section 1.368-1(d).
ARTICLE VI
COVENANTS
SECTION 6.1 REGULATORY MATTERS.
(a) CNC and Harbor shall promptly prepare and file with the SEC a
registration statement on Form S-4, including the definitive proxy statement and
prospectus (the "PROXY STATEMENT/PROSPECTUS") to be mailed to the Harbor
Shareholders in connection with the Harbor shareholders' meeting to vote upon
the Merger (the "S-4"). CNC shall use all reasonable efforts to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing, and Harbor shall thereafter mail the Proxy Statement/Prospectus to
its shareholders. CNC shall also use all reasonable efforts to obtain all
necessary state securities law or "Blue Sky" permits and approvals required to
carry out the transactions contemplated by this Agreement, and obtain the
approval for listing on the New York Stock Exchange of the shares of CNC Common
Stock to be issued to holders of Common Stock in the Merger. Harbor shall
furnish all information concerning Harbor and the holders of Harbor Common Stock
as may be reasonably requested in connection with any such action.
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(b) The parties hereto shall cooperate with each other and use reasonable
best efforts to promptly prepare and file all necessary documentation, to effect
all applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities which are necessary or advisable to
consummate the transactions contemplated by this Agreement (including, without
limitation, the Merger and Bank Merger), and to comply with the terms and
conditions of all such permits, consents, approval and authorizations to review
in advance, and to the extent practicable each will consult the other on, in
each case subject to applicable laws relating to the exchange of information,
all the information relating to Harbor or CNC, as the case may be, and any of
their respective Subsidiaries which appear in any filing made with, or written
materials submitted to, any third party or any Governmental Authority in
connection with the transactions contemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto shall act reasonably and as
promptly as practicable. The parties hereto agree that they will consult with
each other with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities necessary or
advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other apprised of the status of matters relating to
completion of the transactions contemplated herein.
(c) CNC and Harbor shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with the Proxy Statement/Prospectus the S-4 or any other
statement, filing, notice or application made by or on behalf of CNC, Harbor or
any of their respective Subsidiaries to any Governmental Authority in connection
with the transactions contemplated by this Agreement.
(d) CNC and Harbor shall promptly advise each other upon receiving any
communication from any Governmental Authority whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood that
the approval of any Governmental Authority required pursuant to Section 7.1(b)
will not be obtained or that the receipt of any such approval will be materially
delayed beyond March 31, 1998.
SECTION 6.2 SHAREHOLDERS' APPROVALS. Harbor shall duly call, give notice
of, convene and hold a meeting of its shareholders to be held as soon as
practicable following the date hereof for the purpose of obtaining the requisite
shareholder approvals required in connection with this Agreement and the Merger.
Subject to the provisions of the next sentence, Harbor shall, through its Board
of Directors, recommend to its shareholders approval of such matters. Harbor's
Board of Directors may fail to make such recommendation, or withdraw, modify or
change any such recommendation in a manner adverse to CNC if such Board of
Directors, after having consulted with and considered the advice of counsel, has
reasonably determined in good faith that the making of such recommendation, or
the failure to withdraw, modify or change its recommendation, would constitute a
breach of the fiduciary duties of the members of such Board of Directors under
applicable law.
SECTION 6.3 LEGAL CONDITIONS TO MERGER.
(a) Each of CNC and Harbor shall, and shall cause each of its Subsidiaries
to, use its reasonable best efforts (i) to take, or cause to be taken, all
actions necessary, proper or advisable to comply promptly with all legal
requirements which may be imposed on such party or its Subsidiaries with respect
to the Merger and, subject to the conditions set forth in Article VII hereof, to
consummate the transactions contemplated by this Agreement and (ii) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any Governmental Authority and any
other third party which is required to be obtained by Harbor or CNC or any of
their respective Subsidiaries in connection with the Merger and the other
transactions contemplated by this Agreement, and to comply with the terms and
conditions of any such consent, authorization, order or approval.
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(b) Each of CNC and Harbor agrees to use reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions contemplated
hereby, including, without limitation, using reasonable efforts to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby
and using reasonable efforts to defend any litigation seeking to enjoin, prevent
or delay the consummation of the transactions contemplated hereby or seeking
material damages.
SECTION 6.4 INFORMATION.
(a) CNC'S RIGHT TO ACCESS AND INFORMATION. Upon reasonable notice, Harbor
shall, and shall cause each of its Subsidiaries to, afford to CNC and its
representatives (including, without limitation, directors, officers, and
employees, and their affiliates, and counsel, accountants and other
professionals retained) such reasonable access during normal business hours
throughout the period prior to the Effective Time to the books, records
(including, without limitation, Tax Returns and work papers of independent
auditors), properties, policies, files, personnel and to such other information
as such persons may reasonably request, permit such persons to inspect and make
copies of all stock records, minute books, books of account, contracts,
commitments and other records, furnish to CNC such counterpart originals or
certified or other copies of such documents or such information with respect to
its businesses and affairs as CNC may reasonably request and that Harbor and its
Subsidiaries may provide without violation of applicable law or regulation or
jeopardy to any attorney-client or similar privilege to which the Harbor or its
subsidiaries may be entitled as against third parties other than CNC. Without
limiting the foregoing, Harbor shall promptly provide CNC (i) monthly unaudited
balance sheets and operating statements, loan delinquency reports, investment
reports and such other reports and materials as are normally prepared and
provided to the Board of Directors or senior management of the Harbor and (ii)
each month and on the date that is five days prior to the Effective Time, a list
of loans for which a Notice of Default has been filed or for which discussions
have commenced that have a reasonable possibility of leading to a deed in lieu
of foreclosure by the obligor thereunder. Harbor shall provide CNC with as much
information concerning any exit interview or similar meetings held in connection
with any regulatory examinations of Harbor and its Subsidiaries and, with
respect to the examination findings and results, as Harbor can provide without
violation of law. Without limiting the generality of the foregoing, CNC shall
have the right to (i) conduct a full due diligence review of the operations and
assets of Harbor and its Subsidiaries, (ii) conduct a full credit review of
Harbor and its Subsidiaries and (iii) conduct a specific credit review of Harbor
and its Subsidiaries during the thirty days prior to the Effective Time.
(b) HARBOR'S RIGHT TO ACCESS AND INFORMATION. Upon reasonable request by
Harbor, CNC shall (i) make its Chief Financial Officer and Controller available
to discuss with Harbor and its representatives CNC's ongoing diligence and
review of Harbor's operations and (ii) shall provide Harbor with written
information which is (a) similar to the written information that Harbor reviewed
in connection with this Agreement, and (b) related to CNC's and its
Subsidiaries' business condition, operations and prospects.
(c) CUSTOMER CALLS. Prior to the Effective Time, representatives of CNC
will be permitted to conduct joint calls upon customers of the Bank, if
accompanied by representatives of the Bank, on a schedule to be agreed upon
between the parties; provided, however, that in the event that either party
terminates this Agreement in accordance with the terms hereof, CNC shall not,
for a period of one (1) year from the date of the termination of this Agreement
contact any customer of the Bank contacted pursuant to this Section 6.4(c).
(d) CONFIDENTIALITY. Neither party shall, and each shall cause its
representatives not to, use any information obtained pursuant to this Section
6.4 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Subject to the requirements of law, each party
shall keep confidential, and shall cause its representatives to keep
confidential, all information, documents and trade secrets obtained pursuant to
this Section 6.4 unless such information (i) becomes or has become available
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to such party from other sources not known by such party to be bound by a
confidentiality obligation, (ii) is disclosed with the prior written approval of
the party to which such information pertains or (iii) is or becomes readily
ascertainable from published information or trade sources. In the event that
this Agreement is terminated or the Merger shall otherwise fail to be
consummated, each party shall promptly cause all copies of documents or extracts
thereof containing information and data as to another party hereto to be
returned to the party that furnished the same.
SECTION 6.5 EMPLOYEE BENEFITS.
(a) All employees of Harbor continuing in the employ of CNC shall be
entitled to participate in stock plans, bonus plans and all other benefit plans
of CNC on the same basis as other similarly situated employees of CNC. Each of
these employees will be credited for eligibility, participation, vesting and
accrual purposes (provided that no more than 1,080 hours of sick leave may be
carried over into CNC's sick leave program), with such employee's respective
years of past service with Harbor (or other prior service so credited by Harbor)
as though they had been employees of CNC.
(b) Harbor and each of its Subsidiaries has furnished to CNC its severance
policies, if any, applicable to its employees (other than as set forth in the
Disclosure Schedule) and a schedule indicating the amount that would be due as a
severance payment to each such employee if he or she is not offered continued
employment in an equivalent or substantially similar position by CNC following
the Effective Time.
(c) Provided such agreement is listed on the Disclosure Schedule and a
complete copy of such agreement has been provided to CNC prior to the date
hereof, CNC hereby agrees to honor, in accordance with their terms, any existing
individual employment, severance, deferred compensation and similar agreements
between Harbor or any of its Subsidiaries and any current or former officer,
director, employee or consultant of Harbor or such Subsidiary. Notwithstanding
any other provision of this Agreement, no employee shall receive duplicative
benefits by reason of this Section.
(d) Between the date hereof and the Effective Time, Harbor and CNC shall
cooperate to determine the appropriate treatment of the Employee Plans, such as
termination, merger into a CNC plan, etc., and shall take such actions as shall
be reasonably requested by CNC with respect to the Employee Plans, provided that
Harbor shall not be required to take any action that would be materially
disadvantageous to Harbor employees or that would be in breach of the fiduciary
duties of the Plan trustees or administrators.
SECTION 6.6 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. CNC, Harbor and
each of their respective Subsidiaries shall (a) promptly make any filings and
applications required to be filed in order to obtain all approvals, consents and
waivers of the Board of Governors, the OCC, the FDIC, the Department of
Financial Institutions, and any other Governmental Authorities or government
entities necessary or appropriate for the consummation of the transactions
contemplated hereby, (b) cooperate with one another (i) in promptly determining
what filings are required to be made or approvals, consents or waivers are
required to be obtained under any relevant Federal, state or foreign law or
regulation, (ii) in providing the other a reasonable opportunity to review and
comment upon the publicly available portions of such filings, and (iii) in
promptly making any such filings, furnishing information required in connection
therewith and seeking timely to obtain any such approvals, consents or waivers
and (c) deliver to the other copies of publicly available portions of all such
filings and applications promptly after they are filed.
SECTION 6.7 ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all commercially
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly or cause to be done promptly, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement as promptly as practicable,
including using commercially reasonable efforts to obtain all necessary actions
or nonactions, extensions, waivers, consents and approvals from all applicable
Governmental Authorities, affecting all necessary registrations, applications
and filings and
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obtaining any required contractual consents (including consent to assignment of
leases where required) and regulatory approvals.
SECTION 6.8 PUBLICITY. The initial press release announcing this Agreement
shall be a joint press release and thereafter CNC and Harbor shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and in making any filings
with any governmental authority or with any national securities exchange with
respect thereto. If any party hereto, on the advice of counsel, determines that
a disclosure is required by law, it may make such disclosure without the consent
of the other parties, but only after affording the other parties a reasonable
opportunity to review and comment upon the disclosure.
SECTION 6.9 NOTIFICATION OF CERTAIN MATTERS. Harbor shall give CNC, and
CNC shall give Harbor, prompt notice of: (a) any material change in its
business, operations, or prospects, (b) any complaints, investigations or
hearings (or communications indicating that same may be contemplated) of any
governmental agency or Governmental Authority, (c) the institution or the threat
of material litigation, or (d) any event or condition that constitutes a breach
of this Agreement, or that might be reasonably expected to cause its
representations or warranties set forth herein not to be true and correct in all
material respects as of the Effective Time.
SECTION 6.10 PRE-CLOSING ADJUSTMENTS. At or before the Closing, Harbor
shall make, and shall cause its Subsidiaries to make, and the Subsidiaries shall
make, such accounting entries or adjustments, including charge-offs of loans, as
CNC shall direct in order to implement its plans for the Subsidiaries following
the Closing or to reflect expenses and costs related to the Bank Merger;
PROVIDED, HOWEVER, that (a) Harbor and its Subsidiaries shall not be required to
take such actions more than one day prior to the Effective Time or prior to the
time CNC agrees in writing that all of the conditions to its obligation to close
as set forth in Section 7.2 have been satisfied or waived, and (b) based upon
consultation with counsel and accountants for Harbor and its Subsidiaries, no
such adjustment shall (i) require any filing with any governmental agency or
authority, (ii) violate any law, rule or regulation applicable to Harbor or its
Subsidiaries, or (iii) otherwise materially disadvantage Harbor or its
Subsidiaries if the Acquisition were not consummated; PROVIDED that in any
event, no accrual or reserve made by Harbor or its Subsidiaries pursuant to this
Section 6.10, or any litigation or regulatory proceeding arising out of any such
accrual or reserve, shall constitute or be deemed to be a breach, violation of
or failure to satisfy any representation, warranty, covenant, condition or other
provision of this Agreement or otherwise be considered in determining whether
any such breach, violation or failure to satisfy shall have occurred. The
recording of such adjustments shall not be deemed to imply any misstatement of
previously furnished financial statements or information, shall not be construed
as concurrence of Harbor's or its Subsidiaries' management with any such
adjustments, and shall not affect the Exchange Ratio or the Per Share Cash
Consideration.
SECTION 6.11 DIRECTOR RESIGNATIONS. Harbor and its Subsidiaries shall use
reasonable efforts to cause to be delivered to CNC at the Closing, the
resignations of the members of the Board of Directors of Harbor and its
Subsidiaries.
SECTION 6.12 HUMAN RESOURCES ISSUES. Harbor and each of its Subsidiaries
agree to cooperate with CNC with respect to any formal meetings or interviews
with one or more employees called or arranged by it and held for the purpose of
discussing the transactions contemplated by this Agreement or their effect on
such employees, with CNC given the opportunity to participate in such meetings
or interviews. This section is not intended to apply to casual conversations
about the transaction or informal meetings initiated by employees, or to
prohibit discussion in general, but rather to allow CNC a role in the formal
presentation of the transaction to employees, and an opportunity to participate
in the significant, formal meetings at which the transaction is explained and
discussed.
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SECTION 6.13 ASSISTANCE WITH THIRD-PARTY AGREEMENTS.
(a) Harbor and its Subsidiaries shall cooperate with and use all reasonable
efforts to assist CNC in (a) gaining access to all of their third-party vendors,
landlords of all of their leased properties and other parties to material
agreements, promptly after the date of this Agreement, (b) obtaining the
cooperation of such third parties in a smooth transition in accordance with
CNC's timetable at or after the Effective Time. Harbor shall cooperate with CNC
in minimizing the extent to which any contracts will continue in effect
following the Effective Time, in addition to complying with the prohibitions of
Section 4.2(e) hereof.
(b) Without limiting Section 6.13(a), Harbor and its Subsidiaries shall use
all reasonable efforts to provide data processing and other processing support,
including support from outside contractors, to assist CNC in performing all
tasks reasonably required to result in a successful conversion of their data and
other files and records to CNC's production environment, when requested by CNC
and sufficient to ensure that a successful conversion can occur at such time as
CNC requests at or after the Effective Time. Among other things, Harbor and its
Subsidiaries shall:
(i) cooperate with CNC to establish a mutually agreeable project plan to
effectuate the conversion;
(ii) use their commercially reasonable efforts to have Harbor's and its
Subsidiaries' outside contractors continue to support both the conversion
effort and its needs until the conversion can be established;
(iii) provide, or use its commercially reasonable efforts to obtain from
any outside contractors, all data or other files and layouts requested by
CNC for use in planning the conversion, as soon as possible;
(iv) provide reasonable access to personnel at corporate headquarters,
data and other processing centers, all branches and, with the consent of
outside contractors, at outside contractors, to enable the conversion effort
to be completed on schedule; and
(v) to the extent reasonably practicable, give notice of termination,
conditioned upon the completion of the transactions contemplated hereby, of
the contracts of outside data and other processing contractors or other
third-party vendors when directed to do so by CNC.
Notwithstanding the foregoing, neither Harbor nor the Bank shall be required
to give any notice of termination required by this Section 6.13 (x) more than
thirty days prior to the Effective Time and (y) unless CNC states in writing
that, to the best of its knowledge, all conditions to Closing set forth in
Article VII have been or will be satisfied or waived; provided, however, that
Harbor and the Bank shall take action as directed by CNC at any time (1) to
terminate any contract other than that described in clause (2) hereof, if CNC
indemnifies Harbor and the Bank for the incremental costs of obtaining a
replacement contract in the event that the Merger is not consummated other than
due to breaches of this Agreement by Harbor; and (2) to terminate any of the
Bank's outside data processing contracts (the "DP CONTRACTS") if (A) CNC
provides an undertaking to Harbor and the Bank in form and substance reasonably
satisfactory to Harbor and the Bank to the effect that CNC shall, in the event
that the Merger is not consummated, indemnify Harbor and the Bank against all
losses, claims, damages or liabilities resulting from such action, and (B) CNC
agrees to compensate Harbor or the Bank for arrangements through a third-party
provider reasonably acceptable to Harbor providing service levels reasonably
comparable to those provided under the DP Contracts under terms no more
burdensome and at a price no higher to Harbor and the Bank than is provided in
the DP Contracts for their respective needs in the event such contracts are
terminated and the Merger is not consummated, other than as a result of a
failure to consummate the Merger due to breaches of this Agreement by Harbor and
further provided, that CNC's obligations under the foregoing proviso are limited
to payments for one year in an aggregate amount not greater than 150% of that
paid by Harbor or the Bank pursuant to the DP Contracts for the last twelve
months for which such DP Contracts were in effect.
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(c) CNC agrees that all actions taken pursuant to this Section 6.13 shall be
taken in a manner intended to minimize disruption to the customary business
activities of Harbor and its Subsidiaries.
SECTION 6.14 NOTICES AND COMMUNICATIONS. Harbor and its Subsidiaries
shall, if requested to do so by CNC (a) cooperate with CNC by sending necessary
or appropriate customer notifications and communications as drafted by CNC to
advise such customers of the impending transaction and of CNC's plans following
the Effective Time, and (b) take or cause to be taken at the direction of and as
agent for CNC, following the receipt of all approvals of Governmental
Authorities pursuant to Section 7.1(b) all actions necessary to comply with the
provisions of the Worker Adjustment and Retraining Notification Act, as amended
(12 U.S.C Section 2101, ET SEQ.), with respect to all employees of Harbor and
its Subsidiaries covered by such act who are to be terminated by CNC within
sixty days following the effective time, including the issuance of notices to
such employees.
SECTION 6.15 INSURANCE POLICIES ASSIGNMENT. Harbor and its Subsidiaries
agree to make commercially reasonable efforts to obtain consent to partial or
complete assignments of any of their insurance policies if requested to do so by
CNC, to the extent necessary to maintain the benefits to CNC of such policies as
they apply to Harbor and its Subsidiaries. Harbor and its Subsidiaries shall
also inform CNC no later than the Effective Time of any material unfiled
insurance claims of which they have knowledge and for which they believe
coverage exists.
SECTION 6.16 ADDITIONAL AGREEMENTS. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest CNB with full title to all properties,
assets, rights, approvals, immunities and franchises of either CNC or Harbor,
the proper officers and directors of each party to this Agreement shall take all
necessary or appropriate action.
SECTION 6.17 AFFILIATES AND FIVE PERCENT SHAREHOLDERS.
(a) At least 40 days prior to the Effective Time, Harbor shall deliver to
CNC a letter identifying all persons who are, at the time this Agreement is
submitted for approval to the shareholders of Harbor, "affiliates" of Harbor for
purposes of Rule 145 under the Securities Act. Harbor shall use commercially
reasonable efforts to cause each such affiliate to deliver to CNC prior to the
Effective Time a written "Affiliates" agreement, in customary form, providing
that such person shall dispose of the CNC Common Stock to be received by such
person in the Merger only in accordance with applicable law.
(b) Prior to the Effective Time, Harbor shall use commercially reasonable
efforts to cause each person or group of persons who holds more than five
percent (5%) of Harbor's Common Stock (regardless of whether such person is an
"affiliate") to deliver to the law firm delivering the opinion pursuant to
Section 7.3(d) a letter stating that such shareholder(s) have no present
intention to dispose of the CNC Common Stock he or she or they will receive in
the Merger, and committing that he, she or they will not dispose of such CNC
Common Stock in such a manner as to cause a violation of the "continuity of
shareholder interest" requirements of Treasury Regulation 1.368-1.
SECTION 6.18 COOPERATION. Harbor shall and shall cause the Bank to
cooperate with CNC and CNB in all reasonable respects in accomplishing the Bank
Merger.
SECTION 6.19 INDEMNIFICATION AND DIRECTORS AND OFFICERS. CNC agrees that
all rights to indemnification or exculpation now existing in favor of the
directors, officers, employees and agents of Harbor and its Subsidiaries as
provided in their respective articles of incorporation, bylaws, indemnification
agreements or otherwise in effect as of the date hereof with respect to matters
occurring prior to the Effective Time, shall survive the Merger and Bank Mergers
and shall continue in full force and effect. CNC further agrees that, following
consummation of the Merger and Bank Merger, to the greatest extent permitted by
Delaware law, and the organizational documents or bylaws of CNC as in effect of
the date hereof, it shall indemnify, defend and hold harmless individuals who
were officers and directors of Harbor and its Subsidiaries as of the date hereof
or immediately prior to the Effective Time for any claim or loss arising out of
their actions while a director or officer, including any acts relating to this
Agreement, and shall pay
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the expenses, including attorneys' fees, of such individual in advance of the
final resolution of any claim, provided such individuals shall first execute an
undertaking acceptable to the Bank to return such advances in the event it has
finally concluded such indemnification is not allowed under applicable law.
SECTION 6.20 SHAREHOLDERS' AGREEMENT. Harbor will use all reasonable
efforts to cause the directors of Harbor, and certain officers and shareholders
(including the Harbor Bancorp Employee Stock Option Plan) of Harbor, to execute
and deliver to CNC one or more shareholders' agreements substantially in the
form of Exhibit 6.20 hereto, committing such persons, among other things, to
vote their shares of Harbor Common Stock in favor of the Merger at the
shareholders' meeting held for that purpose, granting a proxy for such shares to
CNC, and to certain representations concerning the ownership of Harbor Common
Stock and the CNC Common Stock to be received in the Merger, within five (5)
days after the date of this Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of CNC on the one hand, and of Harbor on the other hand, to close
the Merger shall be subject to the satisfaction or waiver by both parties prior
to the Effective Time of the following conditions:
(a) The Agreement and the Merger shall have been approved by Harbor and CNC
in accordance with applicable law, including the approval and adoption by the
requisite affirmative votes of the holders of Harbor Common Stock entitled to
vote thereon.
(b) CNC shall have procured, as necessary, the required approval, consent or
waiver with respect to the Agreement and the Merger by the Board of Governors,
the OCC, the FDIC and the Department of Financial Institutions, and, in all such
cases, all applicable statutory waiting periods shall have expired; the parties
shall have procured all other regulatory approvals, consents or waivers of
Governmental Authorities that are necessary or appropriate to the consummation
of the Merger; and no approval, consent or waiver referred to in this Section
7.1(b) shall be deemed to have been received if it shall include any condition
or requirement that would, in the good faith determination of CNC, be a
Burdensome Condition on CNC.
(c) No party hereto shall be subject to any order, decree or injunction or a
court or agency of competent jurisdiction which enjoins or prohibits the
consummation of the Merger, the Bank Mergers or any other transactions
contemplated by this Agreement.
(d) No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Authority
which prohibits, materially restricts or makes illegal consummation of the
Merger, the Bank Merger or any other transactions contemplated by this
Agreement.
(e) The Form S-4 covering all of the shares of CNC Common Stock to be issued
in the Merger shall have become effective under the Securities Act, no stop
order suspending the effectiveness of such Form S-4 shall have been issued, no
proceedings for that purpose shall have been initiated, and all necessary "Blue
Sky" permits shall have been obtained.
(f) The shares of CNC Common Stock to be issued in the Merger shall be
approved for listing on the New York Stock Exchange, subject to notice of
issuance.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF CNC. The obligations of CNC to
close the Merger shall be subject to the satisfaction or waiver prior to the
Effective Time of the following additional conditions:
(a) Each of the representations and warranties of Harbor contained in this
Agreement shall, in all material respects, be true at the Effective Time as if
made on such date (or on the date when made in the
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case of any representation or warranty which relates to an earlier date). The
Disclosure Schedule shall be updated and made current to such date as close to
the Effective Time as is reasonable for each type of disclosure and as are
agreed upon by the parties hereto no later than thirty (30) days prior to the
Effective Time; such update of the Disclosure Schedule shall not in any way
affect the representations and warranties set forth in Section 5.1. Harbor shall
have performed, in all material respects, each of its covenants and agreements
contained in this Agreement and CNC shall have received a certificate signed by
the Chief Executive Officer and the Chief Financial Officer of Harbor, at the
Effective Time, to the foregoing effect.
(b) No litigation or proceeding shall be pending against Harbor or any of
its Subsidiaries, brought by any Governmental Authority seeking to prevent
consummation of the transactions contemplated hereby.
(c) CNC shall have received the opinion of Manatt, Phelps & Phillips, LLP,
special counsel to Harbor, in form and substance reasonably satisfactory to CNC,
to the effect that this Agreement has been duly authorized, executed and
delivered by Harbor, and constitutes the valid and legally binding obligation of
Harbor enforceable in accordance with its terms, subject to customary
exceptions.
(d) Harbor shall exercise its best efforts to ensure that at least two days
prior to the Effective Time, all attorneys, accountants, investment bankers and
other advisors and agents for Harbor and its Subsidiaries shall have submitted
to Harbor (with a copy to CNC) estimates of their fees and expenses for all
services rendered in any respect in connection with the transactions
contemplated hereby to the extent not already paid, and based on such estimates,
Harbor shall have prepared and submitted to CNC a summary of such fees and
expenses for the transaction. At the Effective Time (i) such advisors shall have
submitted their final bills for all material fees and expenses to Harbor and its
Subsidiaries for services rendered, with a copy to be delivered to CNC, and
based on such summary, Harbor shall have prepared and submitted to CNC a final
calculation of such fees and expenses (ii) Harbor shall have accrued and paid,
and have caused its Subsidiaries to have accrued and paid, the amount of such
fees and expenses as calculated above, after CNC has been given an opportunity
to review all such bills and calculation of such fees and expenses, and (iii)
such advisors shall have released CNC from liability for any fees and expenses.
CNC shall not be liable for any such fees and expenses.
(e) At least two Business Days prior to the Effective Time, Harbor shall
provide CNC with Harbor's financial statements as of the close of business on
the last day of the month prior to the Effective Time (the "CLOSING FINANCIAL
STATEMENTS." Such financial statements shall have been prepared in all material
respects in accordance with GAAP and RAP and other applicable legal and
accounting requirements, and reflect all period-end accruals and other
adjustments. At the close of business on the last day of the month preceding the
Effective Time, the Adjusted Book Value of Harbor shall be not less than
$17,200,000, PLUS or MINUS the product of (i) $150,000 times (ii) the number of
full months in the period subsequent to or prior to, respectively, December 31,
1997 and the month end prior to the Effective Time. "ADJUSTED BOOK VALUE" for
purposes of this Section 7.2(e) shall mean the shareholders' equity of Harbor as
reflected on the Closing Financial Statements,
(A) PLUS the sum of (1) all severance or retention benefits paid or
accrued prior to the date of the Closing Financial Statements and agreed to
by CNC, (2) all amounts paid or accrued in connection with the cancellation
of options granted pursuant to the Option Plan as permitted by Sections 2.4
and 4.2(b), (3) all amounts paid or accrued in connection with taking any
actions pursuant to Section 6.13, and (4) reasonable expenses of all
attorneys, accountants, investment bankers and other advisors and agents for
Harbor for services rendered solely in connection with the transactions
contemplated by this Agreement,
(B) MINUS the exercise price of all options to purchase shares of Harbor
Common Stock exercised between July 31, 1997 and the date of the Closing
Financial Statements, and
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(C) PLUS the amount of any decreases, and MINUS the amount of any
increases, in the market value of securities held by Harbor during the
period from July 31, 1997 to the date of the Closing Financial Statements
that are marked to market in accordance with GAAP or RAP,
in each case, net of applicable taxes.
(f) At the close of business on the last day of the month preceding the
Effective Time, total deposits of Harbor Bank, calculated pursuant to RAP and
GAAP, shall be not less than ninety percent (90%) of the average of total
deposits for Harbor Bank for the six month period ending on the last day of the
same month in the preceding year.
(g) Between the date of this Agreement and the Effective Time, there shall
not have occurred any event related to the business condition (financial or
otherwise), prospects, operations or properties of Harbor and its Subsidiaries
that has had a Material Adverse Effect on Harbor (PROVIDED that no change
related to the matter identified in Item (a) of Section 5.1(l) of the Disclosure
Schedule shall constitute a Material Adverse Effect).
(h) CNC and its directors and officers who sign the S-4 shall have received
from Harbor's independent certified public accountants "cold comfort" letters,
dated (i) the date of the mailing of the Proxy Statement/Prospectus to Harbor's
shareholders, and (ii) shortly prior to the Effective Time, with respect to
certain material financial information regarding Harbor in the form customarily
issued by such accountants at such times in transactions of this type.
(i) CNC shall have received shareholders' agreements executed and delivered
by each of the directors as contemplated by Section 6.20.
(j) Each of James H. Gray and Dallas E. Haun shall have agreed to an
employment arrangement with CNC.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF HARBOR. The obligations of Harbor
hereunder shall be subject to the satisfaction or waiver prior to the Effective
Time of the following additional conditions:
(a) Each of the representations, warranties and covenants of CNC contained
in this Agreement shall, in all material respects, be true at the Effective Time
as if made on such date (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date); CNC
shall have performed, in all material respects, each of its covenants and
agreements contained in this Agreement; and Harbor shall have received
certificates signed by the Chief Financial Officer or other authorized senior
officers of CNC at the Effective Time, to the foregoing effect.
(b) No litigation or proceeding shall be pending against CNC or any of its
Subsidiaries brought by any Governmental Authority seeking to prevent
consummation of the transactions contemplated thereby.
(c) Harbor shall have received the opinion of Richard H. Sheehan, Jr.,
General Counsel to CNC, in form and substance reasonably satisfactory to Harbor,
to the effect that (i) this Agreement has been duly authorized, executed and
delivered by CNC and constitutes the valid and legally binding obligation of CNC
enforceable in accordance with its terms, subject to customary exceptions and
(ii) the shares of CNC Common Stock issued as consideration in the Merger have
been duly authorized, validly issued, fully paid and non-assessable.
(d) Harbor shall have received the opinion of Munger, Tolles & Olson LLP, no
later than thirty (30) days from the date hereof, in form and substance
reasonably satisfactory to Harbor and its counsel, and confirmed immediately
prior to the Effective Time by such counsel (or, if such counsel cannot give
such opinion or confirmation, by other tax counsel of a prominent law firm
designated by CNC and acceptable to Harbor), substantially to the effect that,
on the basis of facts, representations and assumptions set forth in such
opinion, which are consistent with the state of facts existing at the Effective
Time, that the Merger will qualify as a reorganization under Section 368 of the
Code.
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(e) Harbor shall have received an updated fairness opinion of Hoefer &
Arnett, Inc. dated within five (5) days prior to the mailing of the Proxy
Statement/Prospectus to the shareholders of Harbor confirming that the
consideration to be paid to the Harbor shareholders in the Merger is fair from a
financial point of view to such shareholders.
(f) Between the date of this Agreement and the Effective Time there shall
not have occurred any event related to the business condition (financial or
otherwise), prospects, operations or properties of CNC and its Subsidiaries that
has had a Material Adverse Effect on CNC.
ARTICLE VIII
TERMINATION
SECTION 8.1 TERMINATION. This Agreement may be terminated, and the Merger
abandoned, prior to the Effective Time:
(a) by the mutual agreement of Harbor and CNC, if the board of the
directors, or duly authorized committee thereof, or duly authorized officers, of
each so determines;
(b) by CNC or Harbor in the event of a material breach by the other party
hereto of any representation, warranty, covenant or agreement contained herein,
which is not cured within 30 days after written notice of such breach is given
to the party committing such breach by the other party;
(c) by CNC or Harbor by written notice to the other party if either (i) any
approval, consent or waiver of a Governmental Authority required to permit
consummation of the Merger shall have been denied or (ii) any Governmental
Authority or court shall have issued a final, non-appealable order enjoining or
otherwise prohibiting consummation of the Merger;
(d) by CNC or Harbor in the event that the Merger is not consummated by
March 31, 1998, unless the failure to so consummate by such time is due to the
breach of any covenant or obligation contained in this Agreement by the party
seeking to terminate;
(e) by CNC or Harbor if any approval of the shareholders of Harbor
contemplated by this Agreement shall not have been obtained by reason of the
failure to obtain the required vote at a duly held meeting of shareholders or
any adjournments or postponement thereof;
(f) by CNC if the Board of Directors of Harbor shall have withdrawn,
modified or changed in a manner adverse to CNC its approval or recommendation of
this Agreement and the Merger;
(g) by CNC or Harbor if, at the intended Closing of the Merger, any of the
conditions to such party's obligations provided for in Article VII of this
Agreement shall not have been met or waived by such party;
(h) by CNC, if (i) Harbor shall have exercised a right specified in the
proviso set forth in Section 4.2(v) with respect to any Takeover Proposal and
shall, directly or through agents or representatives, continue discussions with
any third party concerning such Takeover Proposal for more than 15 Business Days
after the date of receipt of such Takeover Proposal; or (ii) a Takeover Proposal
that is publicly disclosed shall have been commenced, publicly proposed or
communicated to Harbor which contains a proposal as to price (without regard to
the specificity of such price proposal) and Harbor shall not have rejected such
proposal within 15 Business Days of its receipt or the date its existence first
becomes publicly disclosed, if earlier; or
(i) by Harbor if a Takeover Proposal exists and the Board of Directors of
Harbor, after having consulted with and considered the advice of outside legal
counsel, reasonably determine in good faith that such action is necessary in the
exercise of its fiduciary duties under applicable law.
(j) by Harbor if the Final CNC Stock Price is less than $17.00.
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SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement by either CNC or Harbor, as provided above, this Agreement shall
thereafter become void and there shall be no liability on the part of any party
hereto or their respective officers or directors, except that any such
termination shall (i) be without prejudice to the rights of any party hereto
arising out of the willful breach by any party of any covenant or willful
misrepresentation contained in this Agreement (PROVIDED, that CNC shall have no
right of action based upon the exercise by the Board of Directors of Harbor of
its fiduciary duties under applicable law as provided in this Agreement), (ii)
not affect Sections 6.4(d), 6.13 and 9.12 hereof which shall survive such
termination and (iii) not affect any provision of this Agreement which expressly
survives the termination of this Agreement. The Stock Option Agreement shall be
governed by its own terms as to termination.
ARTICLE IX
OTHER MATTERS
SECTION 9.1 CERTAIN DEFINITIONS; INTERPRETATIONS. As used in this
Agreement, the following terms shall have the meanings indicated:
"ACTUAL KNOWLEDGE" shall mean facts and other information which as of the
date of this Agreement any executive vice president, chief financial officer,
controller (and, after the date of this Agreement, shall also include any Senior
Vice President), and any officer senior to any of the foregoing of a party
actually knows.
"ALLL" shall mean the allowance for loan and lease losses, as determined in
accordance with GAAP and RAP.
"BURDENSOME CONDITION" shall mean any condition or requirement included in
any required regulatory approval, consent or waivers of Government Authorities
which imposes any condition or restriction on CNC or CNB, including without
limitation, requirements relating to the raising of additional capital or the
disposition of assets, which in the good faith judgment of CNC would be
materially burdensome in the context of the transactions contemplated by this
Agreement.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday, national
holiday or any other day on which national banks operating in California are
permitted or required to close.
"CONTROL" shall have the meaning ascribed thereto in Section 2(a) of the
Bank Holding Company Act of 1956, as amended.
"DISSENTING COMMON STOCK," as described in Section 2.1(c) and Section 2.6,
shall have the meaning set forth in Chapter 13 of the CGCL.
"GAAP" shall mean generally accepted accounting principles, consistently
applied from period to period, applicable to bank holding companies for the
period in question.
"KNOWLEDGE" or "BEST KNOWLEDGE" shall mean facts and other information which
as of the date of this Agreement any executive vice president, chief financial
officer, superior officer, controller (and, after the date of this Agreement,
shall also include any Senior Vice President), and any officer superior to any
of the foregoing of a party knows as a result of the performance of his or her
duties, or that a senior executive officer of a bank or bank holding company
similar to such party with similar duties reasonably should know in the normal
course of his or her duties, and includes such diligent inquiry as is reasonable
under the circumstances.
"MATERIAL" means material to CNC or Harbor (as the case may be) and its
respective Subsidiaries, taken as a whole.
"MATERIAL ADVERSE EFFECT", with respect to a person, means a material
adverse effect upon (A) business, financial condition, operations, or prospects
of such person and its Subsidiaries, taken as a whole, or
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(B) the ability of such person to timely perform its obligations under, and to
timely consummate the Merger provided, however, that in determining whether a
Material Adverse Effect has occurred there shall be excluded any effect on the
referenced party the cause of which is (i) any change in banking or similar
laws, rules or regulations of general applicability or interpretations thereof
by courts or governmental authorities, (ii) any change in GAAP or RAP applicable
to banks or their holding companies generally, (iii) any action or omission of
CNC or Harbor or any subsidiary of either of them taken with the prior written
consent of CNC or Harbor, as applicable or permitted by this Agreement, and (iv)
any changes in general economic conditions affecting banks or their holding
companies generally.
"PERSON" includes an individual, corporation, partnership, association,
trust, limited liability company or partnership or unincorporated organization.
"RAP" shall mean regulatory accounting principles, if any, applicable to a
particular person.
"SUBSIDIARY", with respect to a person, means any other person the stock or
equity of which is more than 50% owned by such person.
"TAXES" shall mean any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other taxes, or assessments in the nature of taxes, of
any kind whatsoever, including any interest, penalty, or addition thereto,
whether disputed or not.
"TAX RETURN" shall mean any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
The table of contents and headings contained in this Agreement offer ease of
reference only and shall not affect the meaning or interpretation of this
Agreement. Whenever the words "include", "includes", or "including" are used in
this Agreement, they shall be deemed followed by the words "without limitation".
Any singular term in this Agreement shall be deemed to include the plural, and
any plural term, the singular.
SECTION 9.2 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. Except for Articles II and III and Sections 6.4(d), 6.5, 6.18, and
6.19, none of the respective representations, warranties, obligations,
covenants, and agreements of the parties shall survive the Effective Time.
SECTION 9.3 WAIVER AND MODIFICATION. Prior to the Effective Time, any
provision of this Agreement may be (a) waived by the party benefited by the
provision or by both parties or (b) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto, approved by their respective boards of directors, PROVIDED HOWEVER, that
any amendment which reduces the amount or changes the form of the consideration
to be delivered to the Harbor Shareholders in the Merger shall not be valid
after the Agreement is approved by the shareholders of Harbor without any
subsequent approval by the shareholders of Harbor.
SECTION 9.4 COUNTERPARTS. This Agreement may be executed in counterparts
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same instrument.
SECTION 9.5 GOVERNING LAW, JURISDICTION AND VENUE. This Agreement shall be
governed by, and interpreted in accordance with, the laws of the State of
Delaware (however, not to the exclusion of any applicable Federal law), without
regard to Delaware statutes or judicial decisions regarding choice of law
questions. The prevailing party shall be entitled to recover all reasonable
costs and expenses, including attorneys' fees, or charges and disbursements
incurred in connection with such suit.
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SECTION 9.6 NOTICES. All notices, requests, acknowledgements and other
communications hereunder (collectively, "NOTICES") to a party shall be in
writing and delivered by hand, federal express (or other reputable overnight
delivery service), telecopy, registered mail or certified mail to such party at
its address set forth below or to such other address as such party may specify
by notice to the other party hereto. All Notices given by telecopy shall be
deemed to have been given upon receipt of confirmation by the sender of such
Notice; all other Notices shall be deemed to have been given when received.
If to Harbor to:
Harbor Bancorp
11 Golden Shore, Suite 600
Long Beach, California 90802
Telecopy: (562) 590-0264
Attention: James H. Gray
with a copy to:
Manatt, Phelps & Phillips
11355 West Olympic Boulevard
Los Angeles, California 90064
Telecopy: (310) 312-4224
Attention: Thomas D. Phelps
If to CNC, to:
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telecopy: (310) 888-6704
Attention: Mr. Frank P. Pekny
with a copy to:
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telecopy: (310) 888-6232
Attention: Richard H. Sheehan
SECTION 9.7 ENTIRE AGREEMENT. Except for the agreements entered into as of
this date or contemplated by this Agreement, the Stock Option Agreement, the
Shareholders' Agreement and the Confidentiality Agreement between CNC and Harbor
dated June 30, 1997, this Agreement (including the Disclosure Schedule attached
hereto and incorporated herein) represents the entire understanding of the
parties hereto with respect to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made;
SECTION 9.8 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, however, this Agreement may not be assigned by
either party hereto without the written consent of the other party.
SECTION 9.9 SEVERABILITY. If any provision of this Agreement or the
application of any such provision to any person or circumstance shall be held
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision hereof.
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SECTION 9.10 NO THIRD PARTY BENEFICIARIES. Except with respect to Sections
6.5 and 6.19 which is intended to benefit the officers and employees of Harbor
and its Subsidiaries, this Agreement is made solely for the benefit of the
parties to this Agreement and their respective successors and permitted assigns,
and no other person or entity shall have or acquire any right by virtue of this
Agreement.
SECTION 9.11 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the U.S. or
any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
SECTION 9.12 EXPENSES. Subject to Section 7.2(d) hereof, each party hereto
shall pay its own costs and expenses incurred in connection with the Merger,
including, without limitation, attorneys' fees, charges and disbursements and
filing or other fees payable in connection with all applications, notifications
and report forms and notices to be filed with any Governmental Authority
pursuant to the terms of this Agreement; provided, however, that the costs and
expenses of printing and mailing the S-4 and the Proxy Statement/Prospectus
shall be borne by CNC, unless the Merger does not occur, in which event such
costs and expenses shall be borne equally by the parties hereto. All filing and
other fees paid to the SEC in connection with the Merger shall be borne by CNC.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
<TABLE>
<S> <C> <C> <C>
HARBOR BANCORP CITY NATIONAL CORPORATION
By: /s/ JAMES H. GRAY By: /s/ RUSSELL GOLDSMITH
---------------------------------------- ----------------------------------------
James H. Gray Russell Goldsmith
PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
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APPENDIX B
CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS--CHAPTER 13
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted the endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date
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of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and
this section, a statement of the price determined by the corporation to
represent the fair market value of the dissenting shares, and a brief
description of the procedure to be followed if the shareholder desires to
exercise the shareholder's rights under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subsection (b) of Section 1300, unless they lose
their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with he secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after the amount thereof has been agreed or
within 30 days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
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SECTION 1304. DISSENTERS' ACTION TO ENFORCE PAYMENT
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determined, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
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SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against he total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT OF PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and
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provisions specifically set forth the amount to be paid in respect to them in
the event of a reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the approved
reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of transaction except upon 10 days' prior
notice to the corporation and upon a determination by the court that clearly no
other remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX C
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT, dated as of August 28, 1997 (the "AGREEMENT"),
is made and entered into by and between City National Corporation, a Delaware
corporation ("CNC"), and Harbor Bancorp, a California corporation ("HARBOR").
WHEREAS, CNC, City National Bank ("CNB") and Harbor are concurrently
herewith entering into an Agreement and Plan of Merger with respect to a
business combination of CNB and Harbor (the "MERGER AGREEMENT"); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, CNC has requested that Harbor agree, and in order to induce CNC to
enter into the Merger Agreement, Harbor has agreed, to grant an option to CNC to
purchase certain shares of common stock, no par value, of Harbor (the "HARBOR
COMMON STOCK");
NOW, THEREFORE, in consideration of the foregoing, and the representations,
warranties, covenants and agreements set forth herein and in the Merger
Agreement, and intending to be legally bound, the parties hereto agree as
follows:
1. GRANT OF OPTION. Harbor hereby grants to CNC an irrevocable option (the
"OPTION") to purchase, subject to the terms hereof, up to 282,901 fully paid and
nonassessable shares (the "OPTION SHARES") of Harbor Common Stock, exercisable
as set forth herein by payment of the Option Price, as defined in Section 4
hereof. The number of shares of Harbor Common Stock that may be received upon
the exercise of the Option and the Option Price is subject to adjustment as set
forth herein.
2. EXERCISE OF OPTION. (a) CNC may, subject to the provisions of this
Section 2 and subject to the conditions of exercise contained in Section 3
hereof, exercise the Option, in whole or in part, at any time following the
occurrence of an Exercise Event, but prior to the Expiration Date (as defined in
Section 3 hereof).
(b) Notwithstanding any other provision of this Agreement to the contrary,
in no event shall CNC have a right to purchase under the terms of this Agreement
more than the number of Option Shares that has a Spread Value of $1,980,500. In
the event that the Spread Value exceeds $1,980,500 at the time CNC wishes to
exercise the Option, the number of Option Shares that CNC is entitled to
purchase on the date of the Closing (as defined herein) shall be reduced to the
extent necessary to reduce the Spread Value following such reduction to an
amount equal to or less than $1,980,500.
3. CONDITIONS OF EXERCISE; EXPIRATION.
(a) It shall be a condition to CNC's exercise of the Option that, at the
time of such exercise (i) CNC is not in breach in any material respect of any
covenant or obligation set forth herein or in the Merger Agreement and (ii)
there is not in effect any preliminary or permanent injunction or other order by
any court of competent jurisdiction which prevents or restrains the issuance and
delivery of the Option Shares.
(b) The right to exercise any part of the Option not previously exercised
shall expire, terminate and be of no further force and effect upon the earliest
to occur (such earliest date, the "EXPIRATION DATE") of (i) the Effective Time
of the Merger, (ii) the date the Merger Agreement is terminated pursuant to
Section 8.1(a) or (j); (iii) the date the Merger Agreement is terminated by
Harbor or CNC pursuant to Sections 8.1(b), (c), (d), (e), (f) or (g) if such
date is prior to the occurrence of an Exercise Event or Preliminary Acquisition
Transaction; or (iv) 18 months following the earliest to occur of (A) the date
of any termination of the Merger Agreement other than as described in clauses
(ii) and (iii) of this sentence or (B) the date of the first occurrence of an
Exercise Event.
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4. MANNER OF EXERCISE.
(a) In the event that CNC wishes to exercise the Option, in whole or in
part, CNC shall send a written notice (the date of which being herein referred
to as the "NOTICE DATE") to Harbor, specifying the number of Option Shares to be
purchased and a place and date not earlier than three nor later than ten
business days following any such Notice Date for the closing of such purchase
(the "CLOSING"); provided that, if prior notification to or approval of the
Federal Reserve Board, the Office of the Comptroller of the Currency (the
"OCC"), the California Commissioner of Financial Institutions (the
"COMMISSIONER"), or any other regulatory agency is required in connection with
such purchase, each party shall cooperate with the other in the filing of the
required notice or application for approval and shall expeditiously process the
same and use its reasonable best efforts, in good faith, to obtain any required
approval; and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed.
(b) At any Closing, CNC will make payment to Harbor for the Option Shares so
purchased at such date by delivery of immediately available funds to Harbor of
$18.00 per Option Share (the "OPTION PRICE"). If the Option is exercised in part
only, CNC shall also deliver all originally executed copies of this Agreement to
Harbor at the Closing in exchange for a new agreement duly authorized and
executed by Harbor identical to this Agreement evidencing the right to purchase
the remaining balance of the Option Shares.
(c) Upon payment of the Option Price, Harbor will immediately deliver to CNC
a certificate or certificates representing such Option Shares registered in the
name of CNC or its assignee or designee.
(d) Certificates for Option Shares delivered at a Closing hereunder may be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the
registered holder hereof and the issuer and to resale restrictions
arising under the Securities Act of 1933, as amended. A copy of
such agreement is on file at the principal office of the issuer
and will be provided to the holder hereof without charge upon
receipt by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if CNC shall have delivered to Harbor a copy of a letter
from the staff of the Securities and Exchange Commission ("SEC"), or an opinion
of counsel, in form and substance reasonably satisfactory to Harbor, to the
effect that such legend is not required for purposes of the Securities Act; (ii)
the reference to the provisions of this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
5. REGISTRATION OF SHARES.
(a) In the event that the Option has become exercisable in accordance with
Section 2 hereof, then, as promptly as practicable upon CNC's request, but, in
any event, within six months from the date of CNC's request, Harbor agrees to
prepare and file a registration statement ("REGISTRATION EVENT") under the
Securities Act, and any applicable state securities laws, with respect to any
proposed disposition by CNC of any or all of the Option Shares and to use its
best efforts to cause such registration statement to become effective as
expeditiously as possible and to keep such registration effective for a period
of not less than ninety days, unless, in the written opinion of counsel to
Harbor, addressed to CNC and which shall be
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reasonably satisfactory in form and substance to CNC and its counsel,
registration is not required for such proposed disposition of the Option Shares.
Notwithstanding the foregoing, Harbor shall have the right to delay (the "DELAY
RIGHT") a Registration Event for a period of up to sixty (60) days in the event
it receives a request from CNC to effect a Registration Event if Harbor (i) is
involved in a material transaction, (ii) determines, in the good faith exercise
of its reasonable business judgment, that such registration and offering could
adversely effect or interfere with bona fide material financing plans of Harbor
or would require disclosure of information, the premature disclosure of which
could materially adversely affect Harbor or any transaction under active
consideration by Harbor, or (iii) reasonably requires such delay in order to
prepare audited financial statements required to be included in such
registration statement. For purposes of this Agreement, the term "material
transaction" shall mean a transaction which would require Harbor to file a
current report on Form 8-K with the SEC. Harbor shall have the right to exercise
two (2) Delay Rights in any twelve (12) month period. All fees, expenses and
charges of any kind or nature whatsoever incurred by Harbor in connection with
the registration of the Option Shares pursuant to this Section 5 shall be borne
and paid by Harbor. Harbor shall indemnify and hold harmless CNC, its affiliates
and its officers, directors, attorneys and agents from and against any and all
losses, claims, damages, liabilities and expenses (including, without
limitation, all out-of-pocket expenses, investigation expenses, expenses
incurred with respect to any judgment and fees, charges and disbursements of
counsel and accountants) arising out of or based upon any statements contained
in, or omissions or alleged omissions from, each registration statement (and
related prospectus) required to be filed pursuant to this Section 5, other than
any losses, claims, damages, liabilities and expenses arising out of or based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement or prospectus in reliance upon
information furnished to Harbor by CNC.
(b) CNC shall be limited to the benefit of two effective demand
registrations as described in Section 5(a) to be requested during the three (3)
years following the date of the first Exercise Event, but shall have an
unlimited number of so-called "piggyback" registration rights. Harbor agrees to
enter into a Registration Rights agreement with CNC containing customary terms,
including appropriate indemnities, which shall only allow underwriters the
ability to cut back the number of shares CNC seeks to have registered on pro
rata basis.
6. REPRESENTATIONS AND WARRANTIES OF HARBOR. Harbor hereby represents and
warrants to, and agrees with, CNC as follows:
(a) AUTHORITY RELATIVE TO THIS AGREEMENT. Harbor has full corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Harbor and no other corporate
proceedings on the part of Harbor are necessary to authorize this Agreement or
to consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Harbor and, assuming that this Agreement has
been duly and validly authorized, executed and delivered by CNC, this Agreement
constitutes a valid and binding agreement of Harbor, enforceable against Harbor
in accordance with its terms.
(b) OPTION SHARES. Harbor has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from the date
hereof through the Expiration Date will have reserved for issuance upon exercise
of the Option, 282,901 shares of Harbor Common Stock, each of which, upon
delivery pursuant hereto, shall be duly authorized, validly issued, fully paid
and nonassessable, and shall be delivered free and clear of all claims, liens,
encumbrances and security interests and not be subject to any preemptive rights.
Harbor will take all necessary corporate action to authorize and reserve for
issuance upon exercise of the Option such additional shares as may be required
pursuant to Section 9 hereof. Harbor will not take, and will refrain from
taking, any action which could reasonably have the effect of preventing or
disabling Harbor from (i) delivery of the Option Shares to CNC upon exercise of
the Option or (ii) from otherwise performing its obligations under this
Agreement.
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(c) CONFLICTING INSTRUMENTS; CONSENTS. Neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
will violate or result in any violation of or be in conflict with or constitute
a default under any term of the Articles of Incorporation or Bylaws of Harbor,
or of any material agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to Harbor. No consent or approval by any
governmental authority, other than compliance with applicable federal and state
securities and banking laws, and regulations of the Federal Reserve Board and
the Commissioner, is required of Harbor in connection with the execution and
delivery by Harbor of this Agreement or the consummation by Harbor of the
transactions contemplated hereby.
(d) NOTICE. Harbor shall give notice to CNC promptly, but in any event
within two business days, of Harbor's first obtaining knowledge of any Exercise
Event or Repurchase Event.
7. REPRESENTATIONS AND WARRANTIES OF CNC. CNC hereby represents and
warrants to Harbor as follows:
(a) AUTHORITY RELATIVE TO THIS AGREEMENT. CNC has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of CNC and no other corporate
proceedings on the part of CNC are necessary to authorize this Agreement or to
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by CNC and, assuming this Agreement has been duly
and validly authorized, executed and delivered by Harbor, this Agreement
constitutes a valid and binding agreement of CNC, enforceable against CNC in
accordance with its terms.
(b) NO DISTRIBUTION. CNC will acquire the Option Shares issued upon
exercise of the Option for its own account, without a view toward the
distribution thereof, and will not sell such Option Shares unless such sale is
registered under the Securities Act or unless an exemption from such
registration is available.
8. NOTIFICATION OF RECORD DATE; POSTPONEMENT OF MEETING. At any time
during the period that this Option may become exercisable by CNC, Harbor shall
give CNC thirty business days' (or such shorter time as is possible under the
circumstances) prior written notice of any record date, for determining the
holders of record of Harbor Common Stock entitled to vote on any matter, to
receive any dividend or distribution, or to receive any other benefit or right,
or for any other purpose that a record date is taken or declared with respect to
the Harbor Common Stock. In the event that CNC, in accordance with this
Agreement, elects to exercise the Option granted hereunder by delivery of the
notice required pursuant to Section 4 after the record date set by Harbor for
any shareholders' meeting, then Harbor shall, upon request by CNC, cancel the
scheduled meeting and its related record date and reschedule it for a later
date; provided, however, that the record date for such rescheduled meeting shall
be a date that is not fewer than ten nor more than thirty business days after
the cancellation of the originally scheduled shareholders' meeting.
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
(a) In the event of any dividend, stock split, split-up, recapitalization,
reclassification, combination, exchange of shares or similar transaction or
event with respect to the Harbor Common Stock, the type and number of shares or
securities subject to the Option, and the Option Price therefor, shall be
adjusted appropriately, and proper provision shall be made in the agreements
governing such transaction so that CNC shall receive, upon exercise of the
Option, the number and class of shares or other securities or property that CNC
would have received in respect of Harbor Common Stock if the Option had been
exercised immediately prior to such event, or the record date therefor, as
applicable. If any shares of Harbor Common Stock are issued after the date of
this Agreement (other than pursuant to an event described in the first sentence
of this Section 9(a)), the number of shares of Harbor Common Stock subject to
the Option shall be adjusted so that, after such issuance, it, together with any
shares of Harbor Common Stock previously issued to CNC pursuant hereto, equals
19.9% of the number of shares of Harbor
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Common Stock then issued and outstanding, without giving effect to any shares
subject to or issued pursuant to this Option.
(b) In the event that Harbor shall, prior to the Expiration Date, enter in
an agreement: (i) to consolidate with or merge into any person, other than CNC
or one of its Subsidiaries, and shall not be the continuing or surviving
corporation of such consolidation or merger, (ii) to permit any person, other
than CNC or one of its Subsidiaries, to merge into Harbor and Harbor shall be
the continuing or surviving corporation, but, in connection with such merger,
the then outstanding shares of Harbor Common Stock shall be changed into or
exchanged for stock or other securities of Harbor or any other person or cash or
any other property or the outstanding shares of Harbor Common Stock immediately
prior to such merger shall after such merger represent less than 50% of the
outstanding shares and share equivalents of the merged company; or (iii) to sell
or otherwise transfer all or substantially all of its assets to any person,
other than CNC or one of its Subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provisions so that the
Option shall, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
(the "SUBSTITUTE OPTION"), at the election of CNC, of either (x) the Acquiring
Corporation (as defined below), (y) any person that controls the Acquiring
Corporation, or (z) in the case of a merger described in clause (ii), Harbor (in
each case, such person being referred to as the "SUBSTITUTE OPTION ISSUER").
(c) The Substitute Option shall have the same terms as the Option, provided
that, if the terms of the Substitute Option cannot, for legal or regulatory
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to CNC. The Substitute Option Issuer shall
also enter into an agreement with the then-holder or holders of the Substitute
Option in substantially the same form as this Agreement, which shall be
applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as hereinafter defined) as is equal to the Assigned
Value (as hereinafter defined) multiplied by the number of shares of the Harbor
Common Stock for which the Option was theretofore exercisable, divided by the
Average Price (as hereinafter defined). The exercise price of the Substitute
Option per share of the Substitute Common Stock (the "SUBSTITUTE OPTION PRICE")
shall then be equal to the Option Price multiplied by a fraction in which the
numerator is the number of shares of the Harbor Common Stock for which the
Option was theretofore exercisable and the denominator is the number of shares
for which the Substitute Option is exercisable.
(e) The following terms have the meanings indicated:
(i) "ACQUIRING CORPORATION" shall mean (x) the continuing or surviving
corporation of a consolidation or merger with Harbor (if other than
Harbor), (y) Harbor in a merger in which Harbor is the continuing or
surviving person, and (z) the transferee of all or any substantial
part of Harbor's assets (or the assets of its Subsidiaries).
(ii) "SUBSTITUTE COMMON STOCK" shall mean the common stock issued by the
Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "ASSIGNED VALUE" shall mean the highest of (x) the price per share
of the Harbor Common Stock at which a Tender Offer or Exchange
Offer therefor has been made by any person (other than CNC or its
Subsidiaries or affiliates), (y) the price per share of the Harbor
Common Stock to be paid by any person (other than CNC or its
Subsidiaries or affiliates) pursuant to an agreement with Harbor,
and (z) the highest closing sale price per share of Harbor Common
Stock quoted on the Nasdaq National Market (or if Harbor Common
Stock is not quoted on the Nasdaq National Market, the highest bid
price per share on any day as quoted on the principal trading
market or securities exchange on which such shares are traded as
reported by a recognized source chosen by CNC) within the six-month
period
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immediately preceding the agreement; provided, that in the event of
a sale of less than all of Harbor's assets, the Assigned Value
shall be the sum of the price paid in such sale for such assets and
the current market value of the remaining assets of Harbor as
determined in good faith by a nationally recognized investment
banking firm selected by CNC and reasonably acceptable to Harbor,
divided by the number of shares of the Harbor Common Stock
outstanding at the time of such sale. In the event that an Exchange
Offer is made for the Harbor Common Stock or an agreement is
entered into for a merger or consolidation involving consideration
other than cash, the value of the securities or other property
issuable or deliverable in exchange for the Harbor Common Stock
shall be determined in good faith by a nationally recognized
investment banking firm mutually selected by CNC and Harbor (or if
applicable, Acquiring Corporation), provided that if a mutual
selection cannot be made as to such investment banking firm, it
shall be selected by CNC.
(iv) "AVERAGE PRICE" shall mean the average closing price of a share of
the Substitute Common Stock for the one-year period immediately
preceding the consolidation, merger or sale in question, but in no
event higher than the closing price of the shares of the Substitute
Common Stock on the day preceding such consolidation, merger or
sale, provided that if Harbor is the issuer of the Substitute
Option, the Average Price shall be computed with respect to a share
of common stock issued by Harbor, the person merging into Harbor or
by any company which controls or is controlled by such merging
person, as CNC may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the aggregate of the shares of Substitute Common Stock
but for this clause (f), the Substitute Option Issuer shall make a cash payment
to CNC equal to the excess of (i) the value of the Substitute Option without
giving effect to the limitation in this clause (f) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (f). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by CNC.
(g) Harbor shall not enter into any transaction described in subsection (b)
of this Section 9 unless the Acquiring Corporation and any person that controls
the Acquiring Corporation assume in writing all the obligations of Harbor
hereunder and take all other actions that may be necessary so that the
provisions of this Section 9 are given full force and effect (including, without
limitation, any action that may be necessary so that the shares of Substitute
Common Stock are in no way distinguishable from or have lesser economic value
than other shares of common stock issued by the Substitute Option Issuer).
10. REPURCHASE AT THE OPTION OF CNC.
(a) At the written request of CNC at any time commencing upon the first
occurrence of a Repurchase Event (as defined in Section 10(d)), Harbor shall
repurchase from CNC the Option and, to the extent permitted by applicable law,
all shares of Harbor Common Stock purchased by CNC pursuant hereto with respect
to which CNC then has Beneficial Ownership. The date on which CNC exercises its
rights under this Section 10 is referred to as the "REQUEST DATE", and the
Request Date must be no later than 12 months after the first occurrence of a
Repurchase Event. Such repurchase shall be at an aggregate price (the
"REPURCHASE CONSIDERATION") equal to the sum of:
(i) the aggregate Option Price paid by CNC for any shares of Harbor
Common Stock acquired pursuant to the Option with respect to which
CNC then has Beneficial Ownership;
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(ii) the excess, if any, of (x) the Applicable Price (as defined below)
for each share of Harbor Common Stock over (y) the Option Price
(subject to adjustment pursuant to Section 9), multiplied by the
number of shares of Harbor Common Stock with respect to which the
Option has not been exercised; and
(iii) the excess, if any, of the Applicable Price over the Option Price
(subject to adjustment pursuant to Section 9) paid (or, in the case
of Option Shares with respect to which the Option has been
exercised but the Closing has not occurred, payable) by CNC for
each share of Harbor Common Stock with respect to which the Option
has been exercised and with respect to which CNC then has
Beneficial Ownership, multiplied by the number of such shares;
provided, that the amount calculated pursuant to clause (ii) and
(iii) of this Section 10(a) shall not exceed $1,980,500.
(b) If CNC exercises its rights under this Section 10, Harbor shall, within
ten business days after the Request Date, pay the Repurchase Consideration to
CNC in immediately available funds, and contemporaneously with such payment CNC
shall surrender to Harbor the Option and the certificates evidencing the shares
of Harbor Common Stock purchased thereunder with respect to which CNC then has
Beneficial Ownership, and CNC shall represent and warrant that it has sole
record and Beneficial Ownership of such shares, that it has not granted any
rights to purchase or otherwise acquire such shares to any person, and that the
same are then free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever. Notwithstanding the foregoing, to the extent that prior
notification to or approval of the Federal Reserve Board, the OCC, the
Commissioner or other regulatory authority is required in connection with the
payment of all or any portion of the Repurchase Consideration, CNC shall have
the ongoing option to revoke its request for repurchase pursuant to this Section
10, in whole or in part, or to require that Harbor deliver from time to time
that portion of the Repurchase Consideration that it is not then so prohibited
from paying and promptly file the required notice or application for approval
and expeditiously process the same (and each party shall cooperate with the
other in the filing of any such notice or application and the obtaining of any
such approval). If the Federal Reserve Board, the OCC, the Commissioner or any
other regulatory authority disapproves of any part of Harbor's proposed
repurchase pursuant to this Section 10, Harbor shall promptly give notice of
such fact to CNC. If the Federal Reserve Board, the OCC, the Commissioner or
other regulatory agency prohibits the repurchase in part but not in whole, then
CNC shall have the right (i) to revoke the repurchase request or (ii) to the
extent permitted by the Federal Reserve Board, the OCC, the Commissioner or
other regulatory agency, determine whether the repurchase should apply to the
Option and/or Option Shares and to what extent to each, and CNC shall thereupon
have the right to exercise the Option as to the number of Option Shares for
which the Option was exercisable at the Request Date less the sum of the number
of shares covered by the Option in respect of which payment has been made
pursuant to Section 10(a)(ii) and the number of shares covered by the portion of
the Option (if any) that has previously been repurchased. CNC shall notify
Harbor of its determination under the preceding sentence within five business
days of receipt of notice of disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of CNC's rights with
respect to any unexercised Options under this Section 10 shall terminate on the
Expiration Date.
(c) For purposes of this Agreement, the "Applicable Price" means the highest
of (i) the highest price per share of Harbor Common Stock paid for any such
share by the person or groups described in Section 10(d)(i), (ii) the price per
share of Harbor Common Stock received by holders of Harbor Common Stock in
connection with any merger or other business combination transaction described
in Section 9(b)(i), (ii) or (iii) or (iii) the highest closing sales price per
share of Harbor Common Stock quoted on the Nasdaq National Market (or if Harbor
Common Stock is not quoted on the Nasdaq National Market, the highest bid price
per share as quoted on the principal trading market or securities exchange on
which such shares are traded as reported by a recognized source chosen by CNC)
during the 60 business days preceding the Request Date; provided, however, that
in the event of a sale of less than all of Harbor's assets, the
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<PAGE>
Applicable Price shall be the sum of the price paid in such sale for such assets
and the current market value of the remaining assets of Harbor as determined in
good faith by an independent national recognized investment banking firm
selected by CNC and reasonably acceptable to Harbor (which determination shall
be conclusive for all purposes of this Agreement), divided by the number of
shares of the Harbor Common Stock outstanding at the time of such sale. If the
consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm selected by CNC and reasonably acceptable to
Harbor, which determination shall be conclusive for all purposes of this
Agreement.
(d) As used herein, "REPURCHASE EVENT" shall occur if (i) any person (other
than CNC or any Subsidiary or affiliate of CNC) shall have acquired Beneficial
Ownership, or the right to acquire Beneficial Ownership, or any "group" (as such
term is defined under the Exchange Act) shall have been formed which
Beneficially Owns or has the right to acquire Beneficial Ownership, of 50% or
more of the then-outstanding shares of Harbor Common Stock, (ii) any of the
transactions described in Section 9(b)(i), 9(b)(ii) or 9(b)(iii) shall be
consummated, or (iii) following an Exercise Event, CNC receives official notice
that an approval of the Federal Reserve Board or any other regulatory authority
required for the exercise of the Option and purchase of the Option Shares will
not be issued or granted.
11. DEFINITIONAL MATTERS.
(a) Capitalized terms used but not defined herein shall have the meanings
ascribed thereto in the Merger Agreement.
(b) The following definitions shall have the meanings set forth herein.
"ACQUISITION TRANSACTION" shall mean:
(i) a merger, consolidation or similar transaction involving Harbor or
any of its Subsidiaries (other than internal transactions solely
involving Harbor and any of its wholly owned Subsidiaries);
(ii) except as expressly permitted by the Merger Agreement, the
disposition, by sale, lease, exchange or otherwise, of assets of
Harbor or any of its Subsidiaries representing 50% or more of the
consolidated assets of Harbor and its Subsidiaries;
(iii) the issuance, sale or other disposition of (including by way of
merger, consolidation, share exchange or any similar transaction)
securities representing 20% or more of the voting power of Harbor
or any of its Subsidiaries; or
(iv) the acquisition by any person or group of persons (other than by
CNC or any of its Subsidiaries or affiliates) of Beneficial
Ownership of, or the right to acquire beneficial ownership of, 20%
or more of the then-outstanding shares of Harbor Common Stock.
"PRELIMINARY ACQUISITION TRANSACTION" shall mean:
(i) the commencement (as such term is defined in Rule 14d-2 promulgated
under the Exchange Act) by any person (other than CNC or any
Subsidiary or affiliate of CNC) of, or the filing by any person
(other than CNC or any Subsidiary or affiliate of CNC) of a
registration statement under the Securities Act with respect to, a
tender offer or exchange offer to purchase shares of Harbor Common
Stock such that, upon consummation of such offer, such person would
own or control 20% or more of the then-outstanding shares of Harbor
Common Stock (such an offer being referred to herein as a "TENDER
OFFER" or an "EXCHANGE OFFER," respectively); or
(ii) the shareholders of Harbor shall have voted and failed to approve
the Merger and the Merger Agreement at any meeting of such
shareholders which has been held for that
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purpose or any adjournment or postponement thereof, the failure of
such a shareholder meeting to occur prior to termination of the
Merger Agreement, or the withdrawal or modification of the
recommendation of Harbor's Board of Directors of the Merger and/or
the Merger Agreement that the shareholders of Harbor approve the
Merger and Merger Agreement, in each case, after there shall have
been a public announcement that any person (other than CNC or any
Subsidiary of or affiliate CNC) shall have (A) made, or disclosed
an intention to make, a proposal to engage in an Acquisition
Transaction, (B) commenced a Tender Offer or filed a registration
statement under the Securities Act with respect to an Exchange
Offer, or (C) filed an application (or given a notice), whether in
draft or final form, under the Bank Holding Company Act of 1956, as
amended, the Bank Merger Act, the Change in Bank Control Act of
1978, or any other federal or state banking law or regulation, for
approval to engage in an Acquisition Transaction.
"BENEFICIAL OWNERSHIP" or "BENEFICIALLY OWNS" shall be defined by, or have
the meaning set forth in Rule 13d-3 promulgated under the Exchange Act.
"EXERCISE EVENT" means the (i) occurrence of an Acquisition Transaction;
(ii) the public authorization, recommendation or endorsement by Harbor of an
Acquisition Transaction; (iii) a public announcement by Harbor of an intention
to authorize, recommend or announce an Acquisition Transaction described in
paragraphs (i) (ii) or (iii) of the definition of Acquisition Transaction; (iv)
the entering into by Harbor of any agreement with any person or group of persons
to effect an Acquisition Transaction; or (v) the termination by Harbor of the
Merger Agreement pursuant to Section 8.1(i) thereof.
"PERSON" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act.
"SPREAD VALUE" shall mean the difference between (i) the product of (1) the
sum of the total number of Option Shares CNC (x) intends to purchase at a
Closing pursuant to the exercise of the Option and (y) previously purchased
pursuant to the prior exercise of the Option, and (2) the closing price of
Harbor Common Stock as quoted on the "bulletin board" on the last trading day
immediately preceding the Closing Date, and (ii) the product of (1) the total
number of Option Shares CNC (x) intends to purchase on the day of the Closing
pursuant to the exercise of the Option and (y) previously purchased pursuant to
the prior exercise of the Option and (2) the applicable Option Price of such
Option Shares.
12. CONSENTS. Each of the parties hereto will use its best efforts to
consummate and make effective the transactions contemplated by this Agreement.
13. FURTHER ASSURANCES. Harbor and CNC will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
14. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement and the Merger Agreement
(a) constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, (b) shall not be amended, altered or modified in any
manner whatsoever, except by a written instrument executed by the parties hereto
and (c) shall not, without the express written consent of the other party
hereto, be assigned by operation of law or otherwise; PROVIDED, HOWEVER, that
CNC may assign its rights and obligations to any wholly owned Subsidiary of CNC,
but such assignment shall not relieve CNC of its obligations hereunder if such
assignee does not perform such obligations.
15. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement or of any provision of the Merger Agreement shall not affect the
validity or enforceability of any other provisions of this Agreement, each of
which shall remain in full force and effect.
16. NOTICES. Any notices or other communications required or permitted
hereunder shall be in writing and shall be deemed duly given upon (a)
transmitter's confirmation of a receipt of a facsimile
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transmission, (b) confirmed delivery by a standard overnight carrier or (c) the
expiration of five business days after the day when mailed by certified or
registered mail, postage prepaid, addressed at the following addresses (or at
such other address as the parties hereto shall specify by like notice):
If to CNC:
<TABLE>
<S> <C>
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telecopy No. (310) 888-6704
Attention: Frank P. Pekny
with a copy to:
City National Corporation
400 North Roxbury Drive
Beverly Hills, California 90210-5021
Telecopy No. (310) 888-6232
Attention: Richard H. Sheehan, Esq.
If to Harbor:
Harbor Bancorp
11 Golden Shore, Suite 600
Long Beach, California 90802
Telecopy No. (562) 590-0264
Attention: James H. Gray
With a copy to:
Manatt, Phelps & Phillips LLP
11355 West Olympic Boulevard
Los Angeles, California 90064-1614
Telecopy No. (310) 312-4224
Attention: Thomas D. Phelps, Esq.
</TABLE>
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
18. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
19. PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person or any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
20. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
21. EXPENSES. Except as set forth in Section 5 hereof, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first written above.
<TABLE>
<S> <C> <C>
CITY NATIONAL CORPORATION
a Delaware corporation
By: /S/ RUSSELL GOLDSMITH
-----------------------------------------
Russell Goldsmith
VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
HARBOR BANCORP
a California corporation
By: /S/ JAMES H. GRAY
-----------------------------------------
James H. Gray
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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APPENDIX D
FAIRNESS OPINION OF HOEFER & ARNETT, INC.
August 28, 1997
Members of the Board of Directors
Harbor Bancorp
11 Golden Shore
Long Beach, CA 90802
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Harbor Bancorp ("Harbor") of the
Exchange Ratio and Per Share Cash Consideration (together the "Purchase Price"),
as defined in Section 2.2 of the Agreement and Plan of Merger dated as of August
28, 1997 (the "Agreement"), in the proposed merger (the "Merger") of City
National Corporation ("City National") with and into Harbor. Pursuant to the
Agreement, Harbor Bank will be merged with and into City National Bank. At the
Effective Time (as such term is defined in the Agreement), Harbor shares will be
converted into the right to receive the Purchase Price. The Purchase Price will
be $24.10, in a combination of City National common shares and cash subject to
adjustment as defined in the Agreement.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) certain publicly available financial and
other data with respect to City National and Harbor, including consolidated
financial statements for recent years and interim periods to June 30, 1997; (iv)
certain other publicly available financial and other information concerning City
National and Harbor and the trading markets for the publicly traded securities
of City National and Harbor; (v) publicly available information concerning other
banks and holding companies, the trading markets for their securities and the
nature and terms of certain other merger transactions we believed relevant to
our inquiry; and (vi) evaluations and analyses prepared and presented to the
Board of Directors of Harbor or a committee thereof in connection with the
Merger. We have held discussions with senior management of City National and of
Harbor concerning their past and current operations, financial condition and
prospects.
We have reviewed with the senior management of Harbor earnings projections for
1997 for Harbor as a stand-alone entity, assuming the Merger does not occur. We
have also reviewed City National's 1997 Budget and Strategic Plan, as well as
consensus earnings estimates for 1998 provided by First Call and Standard &
Poor's for City National as a stand-alone entity. Certain financial projections
for the combined companies and for Harbor and City National as stand-alone
entities were derived by us based partially upon the projections and information
described above, as well as our own assessment of general economic, market and
financial conditions.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the managements of
Harbor and City National as to the reasonableness of the financial and operating
forecasts, projections and projected operating cost savings (and the assumptions
and bases therefor) provided to us, and we have assumed that such forecasts,
projections and projected operating cost savings reflect the best currently
available estimates and judgments of the applicable managements. We have also
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<PAGE>
assumed, without assuming any responsibility for the independent verification of
same, that the aggregate allowances for loan losses for Harbor and City National
are adequate to cover such losses. We have not made or obtained any evaluations
or appraisals of the property of Harbor or City National, nor have we examined
any individual loan credit files. For purposes of this opinion, we have assumed
that the Merger will have the tax, accounting and legal effects described in the
Merger Agreement and assumed the accuracy of the disclosures set forth in the
Form S-4 Registration Statement for the Merger. Our opinion as expressed herein
is limited to the fairness, from a financial point of view, to the holders of
the Common Stock of Harbor of the Purchase Price in the Merger and does not
address Harbor's underlying business decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Harbor and City National, including interest income, interest expense, net
interest income, net interest margin, provision for loan losses, non-interest
income, non-interest expense, earnings, dividends, internal capital generation,
book value, intangible assets, return on assets, return on shareholder's equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
Harbor and for City National; (ii) the assets and liabilities of Harbor and City
National, including the loan, investment and mortgage portfolios, deposits,
other liabilities, historical and current liability sources and costs and
liquidity; and (iii) the nature and terms of certain other merger transactions
involving banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of Harbor and may not be relied upon by any other person or used for
any other purpose without our prior written consent. This letter does not
constitute a recommendation to the Board of Directors or to any shareholder of
Harbor with respect to any approval of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Purchase Price in the Merger is fair,
from a financial point of view, to the holders of the Common Stock of Harbor.
Very truly yours,
HOEFER & ARNETT INCORPORATED
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APPENDIX E
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB/A
(Mark one)
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
</TABLE>
Commission file number 2-79912
------------------------
HARBOR BANCORP
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3764395
(I.R.S. Employer
(State or other jurisdiction of Identification
incorporation or organization) No.)
11 GOLDEN SHORE LONG BEACH,
CALIFORNIA 90802
(Address of Principal Executive
Offices) (Zip Code)
</TABLE>
Issuer's telephone number:
(310) 491-1111
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: $15,088,089
As of February 28, 1997, the aggregate market value of the common stock held
by non-affiliates of the registrant was: $18,840,036
Number of shares of common stock of the registrant outstanding of February
28, 1997: 1,415,214
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PART I
ITEM 1. BUSINESS.
GENERAL
Harbor Bancorp (the "Company") is a corporation that was organized under the
laws of the State of California on July 23, 1982 and commenced business on
December 17, 1982 when, pursuant to a reorganization, the Bancorp acquired all
of the voting stock of Harbor Bank (the "Bank"). As a bank holding company the
Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). A general description of the business of each of the Company's
subsidiaries is set forth below.
The Company's principal business is to serve as a holding company for the
Bank and its subsidiaries and for other banking or banking-related subsidiaries
which the Company may establish or acquire. The Company's principal source of
income is dividends from its subsidiaries. Legal limitations are imposed on the
amount of dividends that may be paid and loans that may be made by the Bank and
its subsidiaries to the Company. As of December 31, 1996, the Company had total
consolidated assets of approximately $200 million, total consolidated net loans
of approximately $141 million, total consolidated deposits of approximately $183
million and total stockholder's equity of approximately $16 million. The Company
does not have any industry segments.
Harbor Bank Properties was incorporated under the laws of the State of
California on September 11, 1975 and is a wholly-owned subsidiary of the
Company. This company is presently inactive.
Harbor Bank was incorporated under the laws of the State of California on
December 3, 1973, and was licensed by the California Superintendent of Banks
(the "Superintendent") and commenced operations as a California state-chartered
bank on May 13, 1974. It currently operates six (6) offices, two offices in Long
Beach, one office in Los Alamitos, one office in Irvine, one office in Fountain
Valley and one office in Huntington Beach, California. As of December 31, 1996,
the Bank had approximately $200 million in assets, approximately $141 million in
net loans, and approximately $184 million in deposits.
H.B. Funding is a California corporation that was incorporated on February
17, 1983 and is wholly-owned by the Bank. H.B. Funding operates as a mortgage
company and currently brokers loans to other lending institutions on a fee
basis.
The Bank provides a wide range of commercial banking services primarily for
professionals and small and medium-sized businesses. Services include those
traditionally offered by commercial banks of similar size and character in
California, such as checking, interest-bearing checking ("NOW") and savings
accounts, Money Market Deposit Accounts and Super NOW accounts, commercial, real
estate, personal, home improvement, automobile, and other installment and term
loans, travelers checks, safe deposit boxes, collection services, and telephone
transfers; however, the Bank places special emphasis on services tailored to
meet the needs of the professional and business market, such as Small Business
Administration ("SBA") loans, and payroll and accounting packages and billing
programs. As part of the Bank's wholesale orientation, it makes few consumer
loans and does not actively solicit personal as opposed to business accounts.
The Bank does not have a trust department; however, the Bank makes arrangements
with correspondent institutions to provide trust services as well as investment
and international banking services.
On August 3, 1993, the Bank and FDIC executed a Memorandum of Understanding
("FDIC Memorandum"). The FDIC Memorandum required the Bank to take certain
actions, including the following: (i) increase Board of Directors participation;
(ii) maintain Tier 1 capital equal to or exceeding six and one-half (6.5%)
percent of the Bank's total assets; (iii) chargeoff or collect certain assets
classified loss, and reduce certain other assets classified substandard in
accordance with a specified reduction schedule; (iv) restrict extensions of
credit to borrowers who had loans previously charged-off or classified
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loss and uncollected, or substandard; (v) revise, adopt, and implement the
following: lending and collection policies, profit plan, business/strategic
plan, liquidity and funds management policy, and internal routine and control
policy; (vi) review adequacy of the reserve for loan losses and establish a
comprehensive policy for determining the adequacy of the reserve for loan
losses; (vii) eliminate and/or correct any and all violations of law; (viii)
file with the FDIC amended Consolidated Reports of Condition and Income as of
December 31, 1993; and (ix) furnish written progress reports detailing the
compliance with the FDIC Memorandum.
As a result of an examination conducted by the FDIC as of January 8, 1996,
the FDIC determined that the Bank was in compliance with the terms of the FDIC
Memorandum, and the FDIC removed the FDIC Memorandum on May 22, 1996.
On January 3, 1995, the Bank and the Superintendent executed a Memorandum of
Understanding ("Superintendent's Memorandum"). The Superintendent's Memorandum
required the Bank to take certain actions, including the following: (i) retain
management acceptable to the Superintendent; (ii) maintain tangible shareholders
equity in an amount which equals or exceeds six and one-half (6.5%) percent of
total tangible assets; (iii) charge-off or collect all assets classified loss,
and reduce certain other assets classified substandard and doubtful in
accordance with a specified reduction schedule; (iv) maintain an adequate
allowance for loan losses, and review the adequacy of the allowance prior to the
end of each calendar quarter; (v) maintain an adequate valuation allowance for
other real estate owned; (vi) correct all violations of law; (vii) revise, adopt
and implement the following: lending and collection policies, investment policy,
internal loan and operations audit policy, liquidity policy, a profit plan and
month-to-month budget for 1995, and an annual schedule to review and adopt all
policies; (viii) avoid distributions to its shareholder without the prior
written consent of the Superintendent; and (ix) furnish written progress reports
to the Superintendent on a quarterly basis.
As a result of a request made by the Board of Directors of Harbor Bank on
May 28, 1996, the Superintendent determined that the Bank was in compliance with
the terms of the Superintendent's Memorandum, and the Superintendent removed the
Superintendent's Memorandum on June 12, 1996.
As a result of an examination conducted by the Federal Reserve Bank of San
Francisco ("FRB") as of March 31, 1994, the Company and the FRB executed a
Memorandum of Understanding (the "FRB Memorandum") dated October 25, 1994. In
accordance with the terms of the FRB Memorandum, the Company agreed to take
certain actions including the following: (i) declare or pay any dividends
without prior written approval; (ii) submit a written plan to maintain an
adequate capital position; (iii) submit a written statement concerning steps to
be taken to improve the condition of the Bank and the Company; (iv) submit
written intercompany tax allocation and payment policies; (v) shall not enter
into any transaction which would result in lending or collateral violations;
(vi) increase borrowings or debt without prior written approval; (vii) enter
into any agreements to acquire any interest in any entities or portfolios, or
engage in any new line of business without prior written approval; and (viii)
form a committee of board of directors to monitor compliance with the provisions
of the FRB Memorandum.
Based on the Company's overall improved financial condition and the adoption
of certain resolutions by the Company's Board of Directors, the FRB terminated
the FRB Memorandum effective December 3, 1996.
SUPERVISION AND REGULATION
HARBOR BANCORP
The capital stock of the Company is subject to the registration requirements
of the Securities Act of 1933. The common stock of the Bank is exempt from such
requirements. The Company is also subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, which include, but are not limited to,
the filing of annual, quarterly and other reports with the Securities and
Exchange Commission.
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The Company, as a bank holding company, is subject to regulation under the
BHC Act and is registered with and subject to the supervision of the Federal
Reserve Board. Under the BHC Act, a bank holding company is defined as any
company which directly or indirectly owns, controls or holds with power to vote,
25% or more of the voting shares of any bank or company that is or becomes a
bank holding company under the BHC Act or which controls the election of a
majority of the directors of the bank or company. The Company is required to
obtain the prior approval of the Federal Reserve Board before it may acquire all
or substantially all of the assets of any bank, or ownership or control of
voting shares of any bank if, after giving effect to such acquisition, the
Company would own or control, directly or indirectly, more than 5% of such bank.
The BHC Act prohibits the Company from acquiring any voting shares of, interest
in, or all or substantially all of the assets of a bank located outside the
State of California unless the laws of such state specifically authorize such
acquisition.
Under the BHC Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries, except
that it may engage in certain activities which, in the opinion of the Federal
Reserve Board, are so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. The Company is also prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company unless the company is engaged
in such activities. The Federal Reserve Board's approval must be obtained before
the shares of any such company can be acquired and, in certain cases, before any
approved company can open new offices. In making such determinations the Federal
Reserve Board considers whether the performance of such activities by a bank
holding company would offer advantages to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices.
Further, the Federal Reserve Board is empowered to differentiate between
activities commenced de novo and activities commenced by acquisition, in whole
or in part, of a going concern.
Although the entire scope of permitted activities is uncertain and cannot be
predicted, the major non-banking activities that have been permitted to bank
holding companies with certain limitations are: making, acquiring or servicing
loans that would be made by a mortgage, finance, credit card or factoring
company; operating an industrial loan company leasing real and personal
property; acting as an insurance agent, broker, or principal with respect to
insurance that is directly related to the extension of credit by the bank
holding company or any of its subsidiaries and limited to repayment of the
credit in the event of death, disability or involuntary unemployment; issuing
and selling money orders, savings bonds and travelers checks; performing certain
trust company services; performing appraisals of real estate and personal
property; providing investment and financial advice; providing data processing
services; providing courier services; providing management consulting advice to
nonaffiliated depository institutions; arranging commercial real estate equity
financing; providing certain securities brokerage services; underwriting and
dealing in government obligations and money market instruments; providing
foreign exchange advisory and transactional services; acting as a futures
commission merchant; providing investment advice on financial futures and
options on futures; providing consumer financial counseling; providing tax
planning and preparation services; providing check guaranty services; engaging
in collection agency activities; and operating a credit bureau. The Company's
primary source of income (other than interest income earned on Company capital)
is the receipt of dividends and management fees from its subsidiaries. The
Bank's ability to make such payments to the Company is subject to certain
statutory and regulatory restrictions. As a bank holding company, the Company is
required to file reports with the Federal Reserve Board and to provide such
additional information as the Federal Reserve Board may require. The Federal
Reserve Board also has the authority to examine the Company and each of its
subsidiaries with the cost thereof to be borne by the Company. In addition,
banking subsidiaries of bank holding companies are subject to certain
restrictions imposed by federal law in dealings with their holding companies and
other affiliates. Subject to certain exceptions set forth in the Federal Reserve
Act, a bank can loan or extend credit to an affiliate, purchase or invest in the
securities of an affiliate, purchase assets from an affiliate,
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accept securities of an affiliate as collateral security for a loan or extension
of credit to any person or company or issue a guarantee, acceptance or letter of
credit on behalf of an affiliate only if the aggregate amount of the above
transactions of the Bank and its subsidiaries does not exceed 10% of the Bank's
capital stock and surplus on a per affiliate basis or 20% of the Bank's capital
stock and surplus on an aggregate affiliate basis. In addition, such transaction
must be on terms and conditions that are consistent with safe and sound banking
practices. A bank and its subsidiaries generally may not purchase a low-quality
asset, as that term is defined in the Federal Reserve Act, from an affiliate.
Such restrictions also prevent a holding company and its other affiliates from
borrowing from a banking subsidiary of the holding company unless the loans are
secured by collateral. The BHC Act also prohibits a bank holding company or any
of its subsidiaries from acquiring voting shares or substantially all the assets
of any bank located in a state other than the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted unless
such acquisition is expressly authorized by statutes of the state in which the
bank to be acquired is located. Legislation recently adopted in California
permits out-of-state bank holding companies to acquire California banks. See
"Effect of Governmental Policies and Recent Legislation" later in this section.
The Company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions the
Bank may not condition an extension of credit on a customer's obtaining other
services provided by it, the Company or any other subsidiary or on a promise by
the customer not to obtain other services from a competitor.
The BHC Act and regulations of the Federal Reserve Board also impose certain
constraints on the redemption or purchase by a bank holding company of its own
shares of stock.
The Federal Reserve Board has cease and desist powers to cover parent bank
holding companies and nonbanking subsidiaries where action of a parent bank
holding company or its non-financial institutions represent an unsafe or unsound
practice or violation of law. The Federal Reserve Board has the authority to
regulate debt obligations (other than commercial paper) issued by bank holding
companies by imposing interest ceilings and reserve requirements on such debt
obligations.
The ability of the Company to pay dividends to its shareholders is subject
to the restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. The Corporation Law further
provides that, in the event that sufficient retained earnings are not available
for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally are
as follows: (i) the corporation's assets equal at least 1 1/4 times its
liabilities; and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years then the corporation's current assets equal at least 1 1/4 times its
current liabilities.
HARBOR BANK
Banks are extensively regulated under both federal and state law. The Bank,
as a California state chartered bank, is subject to primary supervision,
periodic examination and regulation by the Superintendent and the FDIC.
The Bank is insured by the FDIC, which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, the
Bank, as is the case with all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC. Although the
Bank is not a member of the Federal Reserve System, it is nevertheless subject
to certain regulations of the Federal Reserve Board.
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Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and locations of branch offices. Further, the Bank is required to maintain
certain levels of capital.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the stockholders by the Bank. California law restricts the
amount available for cash dividends by state-chartered banks to the lesser of
retained earnings or the bank's net income for its last three fiscal years (less
any distributions to stockholders made during such period). In the event a bank
has no retained earnings or net income for its last three fiscal years, cash
dividends may be paid in an amount not exceeding the net income for such bank's
last preceding fiscal year only after obtaining the prior approval of the
Superintendent.
The FDIC also has authority to prohibit the Bank from engaging in what, in
the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice.
Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of its affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral for loans and
the purchase of assets of such affiliates. Such restrictions prevent affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank in any other affiliate is limited to 10% of the Bank's capital and
surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving other controlling persons of
the Bank. Additional restrictions on transactions with affiliates may be imposed
on the Bank under the prompt corrective action provisions of the FDIC
Improvement Act.
POTENTIAL AND EXISTING ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, may be subject to
potential enforcement actions by the FDIC and the Superintendent for unsafe or
unsound practices in conducting their businesses or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits,
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the imposition
of restrictions and sanctions under the prompt corrective action provisions of
the FDIC Improvement Act.
The regulations of these various agencies govern most aspects of the Bank's
business, including required reserves on deposits, investments, loans, certain
of their check clearing activities, issuance of securities, payment of
dividends, opening of branches, and numerous other areas. As a consequence of
the extensive regulation of commercial banking activities in the United States,
the Bank's business is particularly susceptible to changes in California and the
Federal legislation and regulations which may have the effect of increasing the
cost of doing business, limiting permissible activities, or increasing
competition.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the
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Bank on loans extended to its customers and securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings. These rates are
highly sensitive to many factors that are beyond the control of the Bank.
Accordingly the earnings and growth of the Bank are subject to the influence of
local, domestic and foreign economic conditions, including recession,
unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature and
impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. The
likelihood of any major changes and the impact such changes might have on the
Bank are impossible to predict. Certain of the potentially significant changes
which have been enacted and proposals which have been made recently are
discussed below.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the FDIC Improvement Act was enacted into law. Set
forth below is a brief discussion of certain portions of this law and
implementing regulations that have been adopted or proposed by the Federal
Reserve Board, the Comptroller of the Currency ("Comptroller"), the Office of
Thrift Supervision ("OTS") and the FDIC (collectively, the "federal banking
agencies").
STANDARDS FOR SAFETY AND SOUNDNESS
The FDIC Improvement Act requires the federal banking agencies to prescribe,
by regulation, standards for all insured depository institutions and depository
institution holding companies relating to internal controls, loan documentation,
credit underwriting, interest rate exposure and asset growth. Standards must
also be prescribed for classified loans, earnings and the ratio of market value
to book value for publicly traded shares. The FDIC Improvement Act also requires
the federal banking agencies to issue uniform regulations prescribing standards
for real estate lending that are to consider such factors as the risk to the
deposit insurance fund, the need for safe and sound operation of insured
depository institutions and the availability of credit. Further, the FDIC
Improvement Act requires the federal banking agencies to establish standards
prohibiting compensation, fees and benefit arrangements that are excessive or
could lead to financial loss.
In July 1992, the federal banking agencies issued a joint advance notice of
proposed rule making requesting public comment on the safety and soundness
standards required to be prescribed by the FDIC Improvement Act. The purpose of
the notice is to assist the federal banking agencies in the development of
proposed regulations. In accordance with the FDIC Improvement Act, final
regulations must become effective no later than December 1, 1993.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management,
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underwriting standards and loan-to-value limits that do not exceed the
supervisory limits prescribed by the regulations.
PROMPT CORRECTIVE REGULATORY ACTION
The FDIC Improvement Act requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions
that fall below one or more prescribed minimum capital ratios. The purpose of
this law is to resolve the problems of insured depository institutions at the
least possible long-term cost to the appropriate deposit insurance fund.
The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital requirements),
adequately capitalized (meeting the required capital requirements),
undercapitalized (failing to meet any one of the capital requirements),
significantly undercapitalized (significantly below any one capital requirement)
and critically undercapitalized (failing to meet all capital requirements).
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution will
be deemed to be:
- "well capitalized" if it (i) has total risk-based capital of 10% or
greater, Tier 1 risk-based capital of 6% or greater and a leverage capital
ratio of 5% or greater and (ii) is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet
and maintain a specific capital level for any capital measure;
- "adequately capitalized" if it has total risk-based capital of 8% or
greater, Tier 1 risk-based capital of 4% or greater and a leverage capital
ratio of 4% or greater (or a leverage capital ratio of 3% or greater if
the institution is rated composite 1 under the applicable regulatory
rating system in its most recent report of examination);
- "undercapitalized" if it has total risk-based capital that is less than
8%, Tier 1 risk-based capital that is less than 4% or a leverage capital
ratio that is less than 4% (or a leverage capital ratio that is less than
3% if the institution is rated composite 1 under the applicable regulatory
rating system in its most recent report of examination);
- "significantly undercapitalized" if it has total risk-based capital that
is less than 6%, Tier 1 risk-based capital that is less than 3% or a
leverage capital ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified to
the next lower capital category if the appropriate federal banking agency, after
notice and opportunity for hearing, (i) determines that the institution is an
unsafe or unsound condition or (ii) deems the institution to be engaging in an
unsafe or unsound practice and not to have corrected the deficiency. At each
successive lower capital category, an insured depository institution is subject
to more restrictions and federal banking agencies are given less flexibility in
deciding how to deal with it.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines; of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to
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the appropriate federal banking agency 45 days after becoming undercapitalized.
The appropriate federal banking agency cannot accept a capital plan unless,
among other things, it determines that the plan (i) specifies the steps the
institution will take to become adequately capitalized, (ii) is based on
realistic assumptions and (iii) is likely to succeed in restoring the depository
institution's capital. In addition, each company controlling an undercapitalized
depository institution must guarantee that the institution will comply with the
capital plan until the depository institution has been adequately capitalized on
an average basis during each of four consecutive calendar quarters and must
otherwise provide adequate assurances of performance. The aggregate liability of
such guarantee is limited to the lesser of (a) an amount equal to 5% of the
depository institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the institution
into compliance with all capital standards applicable to such institution as of
the time the institution fails to comply with its capital restoration plan.
Finally, the appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers, subject to certain grandfather provisions for those elected prior to
enactment of the FDIC Improvement Act; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
The FDIC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off-balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans.
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In addition to the risk-based guidelines, the FDIC requires banks to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a bank rated in the highest of the five categories used by
the FDIC to rate banks, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all banks not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the FDIC has the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued, the
Bank currently is unable to predict the impact of the proposal on the Bank if
the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of
assets classified substandard; and (d) estimated credit losses on other assets
over the upcoming 12 months.
OTHER ITEMS
The FDIC Improvement Act also, among other things, (i) limits the percentage
of interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires the
FDIC to charge insurance premiums based on the risk profile of each institution;
(iii) eliminates "pass through" deposit insurance for certain employee benefit
accounts unless the depository institution is well capitalized or, under certain
circumstances, adequately capitalized; (iv) prohibits insured state chartered
banks from engaging as principal in any type of activity that is not permissible
for a national bank unless the FDIC permits such activity and the bank meets all
of its regulatory capital requirements; (v) directs the appropriate federal
banking agency to determine the amount of readily marketable purchased mortgage
servicing rights that may be included in calculating such institution's
tangible, core and risk-based capital; and (vi) provides that, subject to
certain limitations, any federal savings association may acquire or be acquired
by any insured depository institution.
In addition, the FDIC has issued final and proposed regulations implementing
provisions of the FDIC Improvement Act relating to powers of insured state
banks. Final regulations issued in October 1992 prohibit insured state banks
from making equity investments of a type, or in an amount, that are not
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<PAGE>
permissible for national banks. In general, equity investments include equity
securities, partnership interests and equity interests in real estate. Under the
final regulations, non-permissible investments must be divested by no later than
December 19, 1996. The Bank has no such non-permissible investments.
Regulations issued in December 1993 prohibit insured state banks from
engaging as principal in any activity not permissible for a national bank,
without FDIC approval. The proposal also provides that subsidiaries of insured
state banks may not engage as principal in any activity that is not permissible
for a subsidiary of a national bank, without FDIC approval.
The impact of the FDIC Improvement Act on the Bank is uncertain, especially
since many of the regulations promulgated thereunder have only been recently
adopted and certain of the law's provisions still need to be defined through
future regulatory action. Certain provisions, such as the recently adopted real
estate lending standards and the limitations on investments and powers of state
banks and the rules to be adopted governing compensation, fees and other
operating policies, may affect the way in which the Bank conducts its business,
and other provisions, such as those relating to the establishment of the risk-
based premium system, may adversely affect the Bank's results of operations.
Furthermore, the actual and potential restrictions and sanctions that apply to
or may be imposed on undercapitalized institutions under the prompt corrective
action and other provisions of the FDIC Improvement Act may significantly
adversely affect the operations and liquidity of the Bank, the value of its
Common Stock and its ability to raise funds in the financial markets.
CAPITAL ADEQUACY GUIDELINES
The FDIC has issued guidelines to implement the risk-based capital
requirements. The guidelines are intended to establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, takes off-balance
sheet items into account in assessing capital adequacy and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and certain
U.S. Government securities, to 100% for relatively high-risk assets, such as
loans and investments in fixed assets, premises and other real estate owned. The
aggregated dollar amount of each category is then multiplied by the risk-weight
associated with that category. The resulting weighted values from each of the
risk categories are then added together to determine the total risk-weighted
assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) perpetual
preferred stock, cumulative perpetual preferred stock and long-term preferred
stock and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50% of Tier 1 capital. The
inclusion of the foregoing elements of Tier 2 capital are subject to certain
requirements and limitations of the federal banking agencies.
The FDIC has also adopted a minimum leverage capital ratio of Tier 1 capital
to average total assets of 3% for the highest rated banks. This leverage capital
ratio is only a minimum.
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<PAGE>
Institutions experiencing or anticipating significant growth or those with
other than minimum risk profiles are expected to maintain capital well above the
minimum level. Furthermore, higher leverage capital ratios are required to be
considered well capitalized or adequately capitalized under the prompt
corrective action provisions of the FDIC Improvement Act.
SAFETY AND SOUNDNESS STANDARDS
In February 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agency issued final regulations
prescribing uniform guidelines for real estate lending. The regulations require
insured depository institutions to adopt written policies establishing
standards, consistent with such guidelines, for extensions of credit secured by
real estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state-certified or state-licensed appraisers for
transactions in excess of certain amounts. State-certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A
state-licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The FDIC also has authority to impose special assessments
against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. The FDIC, effective September 15, 1995, lowered
assessments from their rates of $.23 to $.31 per $100 of insured deposits to
rates of $.04 to $.31, depending on the condition
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<PAGE>
of the bank, as a result of the recapitalization of the BIF. On November 15,
1995, the FDIC voted to drop its premiums for well capitalized banks to zero
effective January 1, 1996. Other banks will be charged risk-based premiums up to
$.27 per $100 of deposits.
Governor Pete Wilson recently signed Assembly Bill 3351 (the "Banking
Consolidation Bill"), authored by Assemblyman Ted Weggeland and sponsored by the
California State Banking Department (the"Department"), effective July 1, 1997,
which creates the California Department of Financial Institutions ("DFI") to be
headed by a Commissioner of Financial Institutions out of the existing
Department which regulates state chartered commercial banks and trust companies
in California.
The Banking Consolidation Bill, among other provisions, also (i) transfers
regulatory jurisdiction over state chartered savings and loan associations from
the Department of Savings and Loans ("DSL") to the newly created DFI and
abolishes the DSL; (ii) transfers regulatory jurisdiction over state chartered
industrial loan companies and credit unions from the Department of Corporations
to the newly- created DFI; and (iii) establishes within the DFI separate
divisions for credit unions, commercial banks, industrial loan companies and
savings and loans. As the Banking Consolidation Bill has only recently been
enacted, it is impossible to predict with any degree of certainty what impact it
will have on the banking industry in general and the Bank in particular.
Congress has recently passed, and the President has signed into law
provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and
to repay outstanding bonds that were issued to recapitalize the SAIF's successor
as result of payments made due to insolvency of savings and loan associations
and other federally insured savings institutions in the late 1980's and early
1990's. The new law will require savings and loan associations to bear the cost
of recapitalizing the SAIF and, after January 1, 1997, banks will contribute
towards paying off the financing bonds, including interest. In 2000, the banking
industry will assume the bulk of the payments. The new law also aims to merge
the Bank Insurance Fund and SAIF by 1999 but not until the bank and savings and
loan charters are combined. The Treasury Department has until March 31, 1997 to
deliver to Congress on combining the charters. Additionally, the new law also
provides "regulatory relief" for the banking industry by effecting approximately
30 laws and regulations. The costs and benefits of the new law to the Bank can
not currently be accurately predicted.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed in law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain regulatory
approval to acquire an existing bank located in another state without regard to
state law. A bank holding company would not be permitted to make such an
acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United States
or (b) 30% or more of the deposits in the state in which the bank is located. A
state may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum length
of time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction. Effective October 2, 1995, California
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<PAGE>
adopted legislation which "opts California into" the Interstate Act. However,
the California Legislation restricts out of state banks from purchasing branches
or starting a de novo branch to enter the California banking market. Such banks
may proceed only by way of purchases of whole banks.
The Interstate Act is likely to increase competition in the Bank's market
areas especially from larger financial institutions and their holding companies.
It is difficult to asses the impact such likely increased competition will have
on the Bank' operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's law permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two states. The first state allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
On September 28, 1995, Governor Wilson signed Assembly Bill No. 1482, the
Caldera, Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 (the "1995 Act"). The 1995 Act, which was filed with the Secretary of
State as Chapter 480 of the Statutes of 1995, became operative on October 2,
1995.
The 1995 Acts opts in early for interstate branching, allowing out-of-state
banks to enter California by merging or purchasing a California bank or
industrial loan company which is at least five years old. Also, the 1995 Act
repeals the California Interstate (National) Banking Act of 1986, which
regulated the acquisition of California banks by out-of-state bank holding
companies. In addition, the 1995 Act permits California state banks, with the
approval of the Superintendent of Banks, to establish agency relationships with
FDIC-insured banks and savings associations. Finally, the 1995 Act provides for
regulatory relief, including (i) authorization for the Superintendent to exempt
banks from the requirement of obtaining approval before establishing or
relocating a branch office or place of business, (ii) repeal of the requirement
of directors' oaths (Financial Code Section 682), and (iii) repeal of the
aggregate limit on real estate loans (Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of financial institutions in meeting the
credit needs of their local community, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Tax Force on
Fair lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
In February 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than
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regulations, relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan may
result in enforcement proceedings. Additional standards on earnings and
classified assets are expected to be issued in the near future.
CHANGES IN ACCOUNTING PRINCIPLES
In March of 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The statement does not apply to financial
instruments long-term customer relationships of a financial institution (core
deposits), mortgage and other servicing rights, and tax deferred assets. SFAS
121 requires the review of long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances include,
for example, a significant decrease in market value of an assets, a significant
change in use of an asset, or an adverse change in a legal factor that could
affect the value of an asset. If such an event occurs and it is determined that
the carrying value of the asset may not be recoverable, an impairment loss
should be recognized as measured by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Fair value can be determined by a
current transaction, quoted market prices, or present value of estimated
expected future cash flows discounted at the appropriate rate. The statement is
effective for fiscal years beginning after December 15, 1995. The implementation
of SFAS No. 121 did not have a material impact on its results of operations or
financial position.
In May of 1995, the FASB issued SFAS 122, Accounting for Mortgage Servicing
Rights. SFAS No. 122 eliminates distinctions between servicing rights that were
purchased and those that were retained upon the sale of loans. The statement
requires mortgage servicers to recognize as separate assets rights to service
loans, no matter how the rights were acquired. Institutions who sell loans and
retain the servicing rights will be required to allocate the total cost of the
loans to servicing rights and loans based on their relative fair values if the
value can be estimated. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Further, SFAS No. 122 requires that all capitalized
mortgage servicing rights be periodically evaluated for impairment based upon
the current fair value of these rights. This Statement which is superseded by
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, did not have a material effect on the Company's
or the Bank's financial condition and results of operations.
In October of 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation pans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if this statement had been
adopted. The accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. The proforma earnings
per share disclosure required by SFAS 123 are not shown in the Company's notes
to Consolidated Financial Statements as the pro forma impact of applying SFAS
123 is insignificant in 1996.
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<PAGE>
In June of 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and in
December, 1996 issued SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125 (an amendment of FASB Statement No. 125)
establishing accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of the financial-components approach. This approach requires the
recognition of financial assets and servicing assets that are controlled by the
reporting entity, the derecognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. Liabilities and derivatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if practicable.
Servicing assets and other retained interests in transferred assets are required
to be measured by allocating the previous carrying amount between the assets
sold, if any, and the interest that is retained, if any, based on the relative
fair values of the assets on the date of the transfer. Servicing assets retained
are subsequently subject to amortization and assessment for impairment.
Management believes the implementation of this statement will not have a
material effect on the Company's or its subsidiary banks financial condition or
results of operations.
HAZARDOUS WASTE CLEAN-UP COSTS
Management is aware of recent legislation and cases relating to hazardous
waste clean-up costs and potential liability. Based on a general survey of the
loan portfolio of the Bank, conversations with local authorities and appraisers,
and the type of lending currently and historically done by the Bank (the Bank
has generally not made the types of loans generally associated with hazardous
waste contamination problems), management is not aware of any potential
liability for hazardous waste contamination.
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA which requires federal banking agencies to adopt uniform
regulations prescribing standards for real estate lending. Each insured
depository institution must adopt and maintain a comprehensive written real
estate lending policy, developed in conformance with prescribed guidelines, and
each agency has specified loan-to-value limits in guidelines concerning various
categories of real estate loans.
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal
regulations include requirements to maintain non-interest bearing reserves
against deposits, limitations on the nature and amount of loans which may be
made, and restrictions on payment of dividends. The California Superintendent of
Banks approves the number and locations of the branch offices of a bank.
California law exempts banks from the usury laws. Market Area
The Bank and the Company provide a solution-oriented approach to meeting the
banking needs of individuals and businesses through six branches located in Los
Angeles and Orange Counties.
The Company's market areas in the past five years have felt the full impact
of the national recession that continued in California through all of 1996. The
recession has been most felt through the progressive loss of jobs as defense
contractors cut back and restructure; in declines in construction activity;
cutbacks in the aerospace industry and in the closing of more than the normal
number of small businesses. Real estate values have substantially declined with
some properties dropping by 20% to 30% depending on location and price range and
the increases in unemployment statistics. On a positive note, most recent
economic reports point to decreases in unemployment and some increases in both
sales volume and prices of real estate.
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BUSINESS CONCENTRATIONS
As of December 31, 1996, the Bank had approximately $200 million in assets
and $184 million in deposits. No individual or single group of related accounts
is considered material in relation to the Bank's totals, or in relation to its
overall business.
MONETARY POLICY
Banking is a business which depends on rate differentials. In general, the
difference between the interest paid by the Bank on its deposits and its other
borrowings and the interest rate received by the Bank on loans extended to its
customers and securities held in the Bank investment portfolios will comprise
the major portion of the Bank's earnings.
The earnings and growth of the Bank will be affected not only by general
economic conditions, both domestic and international, but also by the monetary
and fiscal policies of the United States and its agencies, particularly the
Federal Reserve Board. The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and combat recession, by its
open market operations in U.S. Government securities, limitations upon savings
and time deposit interest rates, and adjustments to the discount rates
applicable to borrowings by banks which are members of the Federal Reserve
System. The actions of the Federal Reserve Board influence the growth of bank
loans, investments and deposits and also affect interest rates charged on loans
and paid on deposits. The nature and impact that future changes in fiscal or
monetary policies or economic controls may have on the Bank's businesses and
earnings cannot be predicted.
COMPETITION
The banking business in California generally, and in the Bank's primary
service areas specifically, is highly competitive with respect to both loans and
deposits, and is dominated by a relatively small number of major banks with many
offices and operations over a wide geographic area. Among the advantages such
major banks have over the Bank are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets to regions of
higher yield and demand. Such banks offer certain services such as trust
services and international banking which are not offered directly by the Bank
(but which can be offered indirectly by the Bank through correspondent
institutions). In addition, by virtue of their greater total capitalization,
such banks have substantially higher lending limits than the Bank. (Legal
lending limits to an individual customer are based upon a percentage of a bank's
total capital accounts.) Other entities, both governmental and in private
industry, seeking to raise capital through the issuance and sale of debt or
equity securities also provide competition for the Bank in the acquisition of
deposits. Banks also compete with money market funds and other money market
instruments which are not subject to interest rate ceilings.
In order to compete with other competitors in their primary service areas,
the Bank attempts to use to the fullest extent the flexibility which their
independent status permits. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by their respective officers,
directors and employees. In particular, each of the banks offers highly
personalized banking services.
EMPLOYEES
At December 31, 1996, the Company and the Bank employed 96 individuals, all
on a full-time basis. The Company believes that its employee relations are
excellent.
STATISTICAL DISCLOSURE
The following tables and data set forth, for the respective periods shown,
statistical information relating to the Company and its subsidiaries. This
statistical data should be read in conjunction with
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Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Financial Statements and Notes thereto incorporated by
reference herein from the Company's 1996 Annual Report. See "ITEM 6. SELECTED
FINANCIAL DATA, "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," and "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA." Average balances in all tables are computed using daily
average balances for each month divided by the number of months in the period.
Unless the context indicates otherwise, all references to the Company in the
following tables and data include the Company and its subsidiaries on a
consolidated basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER
31, 1994
----------------------------------- ----------------------------------- ----------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST
AVERAGE INCOME YIELDS AVERAGE INCOME YIELDS AVERAGE INCOME
BALANCE OR EXPENSE OR RATES BALANCE OR EXPENSE OR RATES BALANCE OR EXPENSE
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Deposits... $ 495 $ 28 5.56% $ 495 $ 31 6.26% $ 1,445 $ 85
Taxable Securities.......... 24,571 1,436 5.84 28,357 1,739 6.13 20,405 989
Non-taxable Securities...... 369 15 4.18 341 21 6.16 356 22
Federal Funds Sold.......... 16,568 859 5.19 14,696 805 5.48 12,996 537
Loans(1).................... 133,951 12,750 9.52 118,986 11,502 9.67 116,535 10,320
--------- ----------- --- --------- ----------- --- --------- -----------
TOTAL EARNING
ASSETS/INTEREST
INCOME................ 175,954 15,088 8.58% 162,875 14,098 8.66% 151,737 11,953
Reserve for Loan Losses..... (2,948) (3,044) (3,228)
Other Assets................ 22,485 21,539 25,061
--------- --------- ---------
TOTAL ASSETS............ $ 195,491 $ 181,370 $ 173,570
--------- --------- ---------
--------- --------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY
Savings & Interest-bearing
Demand Deposits........... $ 60,577 $ 1,368 2.26% $ 65,702 $ 1,413 2.15% $ 60,854 $ 1,207
Time Deposits............... 32,580 1,687 5.18 24,473 1,185 4.84 21,170 727
Borrowed Funds.............. 54 4 6.29 767 44 5.74 1,135 72
--------- ----------- --- --------- ----------- --- --------- -----------
TOTAL INT-BEARING
LIABILITIES/ INTEREST
EXPENSE............... 93,211 3,059 3.28% 90,942 2,642 2.91% 83,159 2,006
Demand Deposits............. 86,242 75,823 75,253
Other Liabilities........... 1,031 829 1,818
TOTAL LIABILITIES....... 180,484 167,594 160,230
STOCKHOLDERS' EQUITY........ 15,007 13,776 13,340
--------- --------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY................ $ 195,491 $ 181,370 $ 173,570
--------- --------- ---------
--------- --------- ---------
Net Interest Income..... $ 12,029 $ 11,456 $ 9,947
----------- ----------- -----------
Net Interest Income to
Earning Assets........ 6.84% 7.03%
--- ---
<CAPTION>
AVERAGE
YIELDS
OR RATES
-----------
<S> <C>
Interest Earning Deposits... 5.88%
Taxable Securities.......... 4.85
Non-taxable Securities...... 6.18
Federal Funds Sold.......... 4.13
Loans(1).................... 8.86
---
TOTAL EARNING
ASSETS/INTEREST
INCOME................ 7.88%
Reserve for Loan Losses.....
Other Assets................
TOTAL ASSETS............
Savings & Interest-bearing
Demand Deposits........... 1.98%
Time Deposits............... 3.43
Borrowed Funds.............. 6.34
---
TOTAL INT-BEARING
LIABILITIES/ INTEREST
EXPENSE............... 2.41%
Demand Deposits.............
Other Liabilities...........
TOTAL LIABILITIES.......
STOCKHOLDERS' EQUITY........
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY................
Net Interest Income.....
Net Interest Income to
Earning Assets........ 6.56%
---
</TABLE>
- ------------------------------
(1) Included in interest income on loans are fees of $173,517 in 1996, $433,019
in 1995 and $464,313 in 1994. Note: Interest income on nonaccrual loans is
not included in interest income. Interest income on non-taxable securities
is not stated on a tax-equivalent basis. Due to rounding individual amounts
may not agree to audited statements by $1-2.
E-18
<PAGE>
The following table sets forth changes in interest income and interest
expense and the amount of change attributable to variances in volume and
variance in interest rates. The change in interest due to both rate and volume
has been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1996 OVER 1995 1995 OVER 1994
----------------------------------- -------------------------------------
AMOUNT OF CHANGE ATTRIBUTED TO: AMOUNT OF CHANGE ATTRIBUTED TO:
----------------------------------- -------------------------------------
TOTAL TOTAL
INCREASE OR INCREASE OR
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
------------- --------- --------- ------------- ----------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest on taxable securities............. $ (303) $ (232) $ (71) $ 750 $ 437 $ 313
Interest on nontaxable securities.......... (6) 2 (8) (1) (1) --
Interest on deposits with banks............ (3) -- (3) (54) (58) 4
Federal funds sold......................... 54 103 (49) 268 82 186
Interest & fees on loans(1)................ 1,248 1,447 (199) 1,182 227 955
------ --------- --------- ------ ----- ---------
TOTAL INTEREST INCOME.................. 990 1,320 (330) 2,145 687 1,458
Interest Expense:
Interest on Deposits:
Savings & Interest bearing demand........ (43) (99) 56 206 100 106
Other time deposits...................... 502 393 109 458 137 321
Interest on short-term borrowing........... (41) (41) -- (28) -- (28)
------ --------- --------- ------ ----- ---------
TOTAL INTEREST EXPENSE................. 418 253 165 636 237 399
------ --------- --------- ------ ----- ---------
Net Interest Spread.......................... $ 572 $ 1,067 $ (495) $ 1,509 $ 450 $ 1,059
------ --------- --------- ------ ----- ---------
------ --------- --------- ------ ----- ---------
</TABLE>
- ------------------------
Note: Individual line items may not agree exactly to changes apparent from the
audited statements by $1-2 due to rounding.
(1) Included in interest & fees on loans are fees of $173,517 in 1996 and
$433,019 in 1995.
(2) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the dollar
amounts of the change in each. The following table shows the distribution
of assets, liabilities and stockholders' equity; interest rates and
interest differential (dollars in thousands).
INVESTMENT PORTFOLIO
The Bank positions its investment portfolio to maintain a level of liquidity
considered adequate within the prevailing economic climate. Under this policy,
purchases of investment securities as well as the sale of federal funds are made
after consideration of liquidity requirements.
The book value of the investment portfolio by investment category for the
last three years ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
U.S. gov't & agency obligations.............................. $ 23,510 $ 33,812 $ 33,721
Obligations of state/political subdivisions.................. 543 338 341
Mutual funds, net............................................ 799 832 757
--------- --------- ---------
$ 24,852 $ 34,982 $ 34,819
--------- --------- ---------
--------- --------- ---------
</TABLE>
E-19
<PAGE>
Maturities of the investment portfolio by investment categories is as
follows at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
ONE YEAR
BOOK LESS THAN THRU FIVE THRU AFTER
VALUE ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. gov't & agency obligations..... $ 23,510 $ 18,818 $ 2,802 $ 1,619 $ 271
Obligations of state/political
subdivisions...................... 543 104 25 414 --
Mutual funds, net................... 799 -- -- -- 799
--------- ----------- ----------- ----------- -----------
$ 24,852 $ 18,921 $ 2,827 $ 2,033 $ 1,070
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Yield-Weighted Average.............. 4.84% 7.53% 6.16% 10.31%
</TABLE>
- ------------------------
Note: Interest income on non-taxable securities is not stated on a
tax-equivalent basis.
LOAN PORTFOLIO
(IN THOUSANDS)
<TABLE>
<CAPTION>
DOMESTIC
----------------------------
REAL ESTATE
LOANS
COMMERCIAL (CONSTRUCTION)
----------- ---------------
<S> <C> <C>
Maturity Distribution:
Due within one year.............................................. $ 31,008 $ 523
Due after one but before five years.............................. 19,114 --
Due after five years............................................. 37 266
----------- -----
TOTAL AT DECEMBER 31, 1996....................................... $ 50,159 $ 789
----------- -----
----------- -----
Interest Sensitivity: Loans Due
After One Year
Fixed-rate loans............................................. $ 10,001 $ --
Prime-tied loans............................................. 9,149 266
----------- -----
TOTAL AT DECEMBER 31, 1996....................................... $ 19,150 $ 266
----------- -----
----------- -----
</TABLE>
The composition of the Company's loan portfolio for the last five years
ended December 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial....................... $ 50,523 $ 51,528 $ 46,502 $ 46,698 $ 66,788
Commercial--real estate
secured........................ 69,295 53,434 45,311 39,222 4,738
Real Estate-secured.............. 17,021 16,127 15,101 18,661 22,721
Real Estate-construction......... 789 3,412 4,329 12,089 13,286
Installment...................... 6,360 5,911 3,607 3,838 2,748
---------- ---------- ---------- ---------- ----------
TOTAL.......................... $ 143,988 $ 130,412 $ 114,850 $ 120,508 $ 110,281
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
E-20
<PAGE>
LOANS CONTRACTUALLY PAST DUE
(ALL DOMESTIC)
<TABLE>
<CAPTION>
PAST DUE 90 DAYS(2)
TROUBLED DEBT -------------------------- LOANS ON
RESTRUCTURING AMOUNT % OF TOTAL NON ACCRUAL(1)
------------- ----------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996:
Commercial................................................. $ 45 $ 87 .17% $ 1,262
Real Estate-secured........................................ 1,836 -- .00% 2,521
Real Estate-construction................................... -- -- -- --
Installment................................................ -- 83 1.30% --
------ ----- --- ------
TOTAL.................................................... $ 1,881 $ 170 .12% $ 3,783
------ ----- --- ------
------ ----- --- ------
December 31, 1995:
Commercial................................................. $ 769 $ 46 .09% $ 1,190
Real Estate-secured........................................ 335 35 .05% 5,497
Real Estate-construction................................... 49 -- -- --
Installment................................................ 12 40 .67% 59
------ ----- --- ------
TOTAL.................................................... $ 1,165 $ 121 .09% $ 6,746
------ ----- --- ------
------ ----- --- ------
December 31, 1994:
Commercial................................................. $ -- $ 97 .21% 2,041
Real Estate-secured........................................ -- .00% 3,636
Real Estate-construction................................... -- .00% --
Installment................................................ -- .00% 63
------ ----- --- ------
TOTAL.................................................... $ $ 97 .08% $ 5,740
------ ----- --- ------
------ ----- --- ------
December 31, 1993:
Commercial................................................. $ -- $ 196 .26% 827
Real Estate-secured........................................ 531 1.84% 3,176
Real Estate-construction................................... -- .00% 833
Installment................................................ 14 .27% 34
------ ----- --- ------
TOTAL.................................................... $ -- $ 741 .61% $ 4,870
------ ----- --- ------
------ ----- --- ------
December 31, 1992:
Commercial................................................. $ -- $ 450 .67% $ 1,865
Real Estate-secured........................................ -- .00% 2,875
Real Estate-construction................................... -- .00% --
Installment................................................ 1 .03% 101
------ ----- --- ------
TOTAL.................................................... $ -- $ 451 .41% $ 4,841
------ ----- --- ------
------ ----- --- ------
</TABLE>
- ------------------------
(1) Interest income which would have been recognized in 1996 and 1995 on
nonperforming loans was approximately $172,713 and $260,264 respectively.
The amount of interest income on nonperforming loans that was included in
net income in 1996 was none.
(2) Loans on Non Accrual have been excluded from the Past Due 90 Day column.
E-21
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans outstanding at year-end, net of
unearned interest income........................... $ 143,988 $ 130,412 $ 114,850 $ 120,508 $ 110,281
---------- ---------- ---------- ---------- ----------
Average loans outstanding, net of
unearned interest income........................... $ 133,951 $ 118,986 $ 116,535 $ 112,023 $ 108,226
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Reserve balance, beginning of year................. $ 3,003 $ 3,224 $ 3,667 $ 1,355 $ 1,029
Recoveries:
Commercial......................................... 77 17 20 39 19
Installment........................................ 2 2 24 5 12
---------- ---------- ---------- ---------- ----------
TOTAL............................................ 79 19 44 44 31
Loans charged off:
Commercial......................................... (672) (393) (1,401) (1,143) (126)
Real Estate-mortgage............................... (781) (137) (126) -0- -0-
Installment........................................ (51) (22) (48) (153) (63)
---------- ---------- ---------- ---------- ----------
TOTAL............................................ (1,504) (552) (1,575) (1,296) (189)
---------- ---------- ---------- ---------- ----------
Net loans charged off................................ (1,425) (533) (1,531) (1,252) (158)
Provision charged to expense......................... 1,159 312 1,088 2,958 484
Acquired from Bank of San Diego...................... 606
---------- ---------- ---------- ---------- ----------
Allowance balance, end of year....................... $ 2,737 $ 3,003 $ 3,224 $ 3,667 $ 1,355
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net loans charged off to
average loans outstanding.......................... 1.06% 0.45% 1.31% 1.12% .15%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of allowance for loan
losses to loans at year end........................ 1.90% 2.30% 2.81% 3.04% 1.23%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The Company does not anticipate charge-offs in 1997 for any loan categories,
however, the Company gives no assurance that charge-offs will not occur in 1997.
POLICY FOR NON-ACCRUAL LOANS
The policy of Harbor Bank is that all loans that are past due for ninety
(90) days must be placed on a non-accrual status. In addition, loans in which it
is probable that full collection of principal will not occur are placed on
non-accrual status.
RISK ELEMENTS IN LOAN PORTFOLIO
AND
DETERMINATION OF THE ALLOWANCES FOR LOAN LOSSES
The allowance for loan losses represents management's recognition of the
quality of the loan portfolio. The allowance is maintained at a level considered
to be adequate for potential loan losses based on management's assessment of
various factors affecting the loan portfolio, which includes a review of problem
loans, business conditions and the overall quality of the loan portfolio.
The allowance is increased by the provision for loan losses charged to
operations and reduced by loans charged off to the allowance, net of recoveries.
During 1996, $1,159,269 was provided for loan losses compared to $312,596
provided during 1995 and $1,088,000 provided in 1994. The substantial provision
for
E-22
<PAGE>
loan losses in 1994 was necessitated by high levels of non-performing and
classified loans and loan charge-offs. The increase in the provision from 1995
to 1996 was primarily due to problem asset resolution which is reflected in the
reduction of non-performing assets.
The following table shows an allocation of the allowance for loan losses as
of the end of 1995 and 1996.
<TABLE>
<CAPTION>
PERCENT OF
LOANS IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
----------- -------------------
<S> <C> <C>
December 31, 1996:
Commercial.................................................... $ 2,006 83.2%
Real Estate-secured........................................... 704 11.8
Real Estate-construction...................................... 9 0.6
Installment................................................... 19 4.4
----------- -----
$ 2,738 100.0%
----------- -----
----------- -----
December 31, 1995:
Commercial.................................................... $ 1,059 39.5%
Real Estate-secured........................................... 1,795 53.3
Real Estate-construction...................................... 116 2.6
Installment................................................... 33 4.5
----------- -----
$ 3,003 100.0%
----------- -----
----------- -----
December 31, 1994:
Commercial.................................................... $ 1,863 59.7%
Real Estate-secured........................................... 1,151 31.7
Real Estate-construction...................................... 165 4.2
Installment................................................... 45 4.4
----------- -----
$ 3,224 100.0%
----------- -----
----------- -----
December 31, 1993:
Commercial.................................................... $ 2,415 62.4%
Real Estate-secured........................................... 954 23.9
Real Estate-construction...................................... 220 9.4
Installment................................................... 78 4.3
----------- -----
$ 3,667 100.0%
----------- -----
----------- -----
December 31, 1992:
Commercial.................................................... $ 995 60.6%
Real Estate-secured........................................... 207 23.9
Real Estate-construction...................................... 100 12.0
Installment................................................... 54 3.5
----------- -----
$ 1,356 100.0%
----------- -----
----------- -----
</TABLE>
Management believes that the allowance for loan and lease losses is adequate
for potential loan losses. In addition, the Bank has undertaken a number of
actions including restructuring loan administration, developing and adopting new
or revised policies, procedures and systems that are designed to improve the
credit, review and classification processes, and reduction of classified assets
and nonperforming assets.
E-23
<PAGE>
RETURN ON EQUITY AND ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net Income......................................... $ 1,197 $ 1,238 $ 158
Average Total Assets............................... 195,491 181,370 173,570
RETURN ON AVERAGE ASSETS........................... 0.61% 0.68% 0.09%
Net Income......................................... $ 1,197 $ 1,238 $ 158
Average Equity..................................... 15,007 13,776 13,340
RETURN ON AVERAGE EQUITY........................... 7.98% 8.99% 1.18%
Average Total Equity............................... $ 15,077 $ 13,776 $ 13,340
Average Total Assets............................... 195,491 181,370 173,570
AVERAGE TOTAL EQUITY TO ASSET RATIO................ 7.71% 7.60% 7.69%
Dividend Declared Per Share........................ $ -- $ -- $ --
Net Income Per Share............................... $ 0.83 $ 0.88 $ 0.11
DIVIDEND PAYOUT RATIO.............................. -- --
</TABLE>
The FDIC, based upon their examination dated January 8, 1996 believes that
capital levels have been maintained above prescribed regulatory minimums for
well capitalized banks.
DEPOSITS
The following table sets forth by time remaining to maturity, domestic time
certificates of deposit in amounts of $100,000 or more at December 31, 1996 (in
thousands):
<TABLE>
<S> <C>
Less than three months............................................. $ 11,556
Three to six months................................................ 10,550
Six to twelve months............................................... 1,320
Over twelve months................................................. 402
---------
$ 23,828
---------
---------
</TABLE>
The following table sets forth the average amount of and average rate paid
on each of the following deposit categories for the last three years ended
December 31, 1996:
<TABLE>
<CAPTION>
AVERAGE DEPOSITS AVERAGE RATES
---------------------------------- -------------------------------
1996 1995 1994 1996 1995 1994
---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits..................... $ 86,242 $ 75,823 $ 75,253 -- -- --
Interest bearing demand
deposits..................... 49,503 53,125 44,883 3.86% 3.65% 3.25%
Savings deposits............... 11,074 12,577 15,971 2.20% 2.18% 2.22%
Time deposits.................. 32,580 24,473 21,170 5.18% 4.81% 3.43%
---------- ---------- ----------
Total deposits............. $ 179,399 $ 165,998 $ 157,277
</TABLE>
E-24
<PAGE>
ITEM 2. PROPERTIES
The Company's Corporate offices and the Bank's Main office are located at 11
Golden Shore, Long Beach, California, 90802, within a six-story modern
free-standing structure. The banking facilities are located on the main floor
and contain 7,500 square feet. The premises include three walk-up windows, a
vault, safe deposit boxes and a parking lot for approximately 60 cars. The
administrative offices are located on the sixth floor and use approximately
12,000 square feet of that floor. The Bank has under lease the remaining 4,000
square feet of the sixth floor, which has been subleased to other tenants. The
office building is named and signed Harbor Bank. There are two levels of parking
below ground which provide adequately for Bank personnel and other personnel
within the building.
In connection with its Golden Shore office, the Bank entered into a Lease
Agreement for a term of ten years, renewable by the Bank for an additional ten
year term to expire December 2002. The Lease Agreement (lease) is a triple net
lease, and the Bank is responsible for nearly every cost and expense associated
with renting its premises. The annual cost of the lease in 1997 is expected to
be $805,000. Annual increases in the Bank's rental obligations under the Lease
will not exceed 7% or the cost of living index each year, and will be reviewed
every three years.
The Bank's Marina office is located in a one-story, free-standing structure
with approximately 7,500 square feet of area located at 6265 E. Second Street,
Long Beach, California 90803. The building was converted in part for the Bank's
use of approximately 16,000 square feet, of which 6,000 is currently leased to
R.B. Williams & Associates and 2,400 square feet is leased to Bancap Investment
Group. The facility is located within a retail business complex with all parking
as joint use. The premises include a vault, safe deposit boxes, a two-lane
drive-up facility and two walk-up windows. The lease term expires in December
2000 and the expected annual cost in 1997 is $295,000. The Bank's Los Alamitos
office is located in a one-story, modern free-standing structure with
approximately 7,500 square feet of area located at 5252 Katella Avenue, Los
Alamitos, California 90720. The Bank leases the land at a monthly cost of $6,360
(for an annual rental of $76,320) and the lease expires in 1999. There is
parking for approximately 35 cars. These premises also include a vault, safe
deposit boxes, a four-lane drive-up facility and a walk-up window.
The Bank's Huntington Harbour office is located within a retail shopping and
business complex, and has approximately 3,700 square feet of area at 16400
Pacific Coast Highway, Huntington Beach, California 92649. The space is leased
with an annual cost of $102,000 and an expiration date of November 1999. There
is ample parking which is shared with other tenants. The premises include a
vault, safe deposit boxes, a two-lane drive-up facility and two walk-up windows.
The Bank's Fountain Valley office is located in a free-standing, modern,
two-story structure located at 10760 Warner Avenue, Fountain Valley, California
92708. The Bank owns the building and land which has a fair market value of
approximately $850,000. The Bank occupies 4,000 square feet of the ground floor
and has approximately 3,400 square feet of rental space available. The Bank
premises include a vault, safe deposit boxes, three drive-up tellers and a
walk-up teller.
The Bank's South Coast office is located in a free-standing, modern building
and is part of a business complex at 9 Executive Circle, Irvine, California
92714. The bank leases the ground floor of the building which is approximately
22,940 square feet and occupies approximately 13,870 square feet which includes
a branch office and also a Service Center operation at a monthly cost of $40,000
(for an annual rental of $480,000). The lease expires in March of 2005. The Bank
premises include a vault, safe deposit boxes, two drive-up tellers and a walk-up
teller window. The remaining 9,073 square feet is subleased to Opera Pacific and
the Building Industry Association of Orange County.
ITEM 3. LEGAL PROCEEDINGS.
Due to the nature of their business, the Company, the Bank, and their
subsidiaries are subject to legal actions threatened or filed which arise from
the normal course of their business. Management believes that
E-25
<PAGE>
such litigation is incidental to the business of the Company and the Bank and
the eventual outcome of all currently pending legal proceedings against the Bank
will not be material to the Company's or the Bank's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Harbor Bancorp is not listed on any stock exchange nor
with the NASDAQ. Although there is a relatively limited trading market in the
common stock of Harbor Bancorp, management is aware that Everen Securities,
Inc., Smith Barney, Ryan, Beck & Co., Elmer E. Powell & Company, Burford
Capital, Jim Alexander Securities,Inc. and Hoefer and Arnett make a market in
the Company's stock. The number of stockholders of record on December 31, 1996
was approximately 418.
The following table, which summarizes stock activity during the Company's
two fiscal years is based upon information provided by Everen Securities and
Hoefer & Arnett.
<TABLE>
<CAPTION>
SALES PRICE
---------------------------------
QUARTER ENDED: HIGH LOW DIVIDEND
- ------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
March 31, 1995............................................... $ 7.75 $ 6.50
June 30, 1995................................................ 8.50 7.00
September 30, 1995........................................... 10.00 7.50
December 31, 1995............................................ 11.00 8.875
March 31, 1996............................................... $ 10.797 $ 9.82
June 30, 1996................................................ 10.375 9.75 (1)
September 30, 1996........................................... 11.00 9.00
December 31, 1996............................................ 12.75 10.625
</TABLE>
- ------------------------
(1) 5% stock dividend at 4/19/96
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Operating results:
Net interest income............ $ 12,029,588 $ 11,456,120 $ 9,946,446 $ 10,341,090 $ 10,167,942
Provision for loan losses...... 1,159,269 312,596 1,088,000 2,958,359 484,000
Net income..................... 1,196,546 1,238,534 157,940 (660,710) 842,828
Earnings per share............. 0.83 0.88 0.11 (0.49) 0.64
Cash dividends................. -- -- -- -- 291,259
Balance sheet total:
Total assets................... $ 200,103,495 $ 195,092,129 $ 176,465,496 $ 191,051,914 $ 168,115,137
Net loans...................... 141,250,271 127,408,913 111,625,771 116,840,943 108,925,048
Deposits....................... 183,431,500 179,204,795 162,111,914 176,001,561 153,397,098
Total stockholders'equity...... 15,699,982 14,556,427 13,134,930 13,095,952 13,750,862
</TABLE>
E-26
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to provide a better understanding of the significant
changes and trends relating to the financial condition, results of operations,
capital resources, liquidity and interest rate sensitivity of the Company during
the three-year period ended December 31, 1996. The following discussion will
focus on Harbor Bancorp's goals in conjunction with current events and trends.
Reference should be made to the accompanying Consolidated Financial Statements
of the Company and related notes for an understanding of the following
discussion and analysis.
FINANCIAL CONDITION
ASSETS
Total assets increased $5,011,366, or 2.6%, from $195,092,129 at December
31, 1995 to $200,103,495 at December 31, 1996. The net increase in total assets
results primarily from an increase in loans, offset by a decline in investment
securities. Total earning assets also experienced an increase of $6,645,359, or
3.9%, from $171,089,797 at December 31, 1995 to $177,735,156 at December 31,
1996. The increase in total assets and total earning assets from December 31,
1995 to December 31, 1996, is primarily the result of strong growth in loans and
a modest increase in core deposits.
Total loans increased by $13,575,643, or 10.4%, from $130,412,144 at
December 31, 1995 to $143,987,787 at December 31, 1996. In 1996, the Company
benefited from a continued consolidation in the banking industry in Southern
California due to bank mergers, acquisitions and closures. The increase in the
loan portfolio is primarily a result of additional volume generated due to the
industry consolidation. Management continues to emphasize funding only the best
credits and there has been no change in the Company's philosophy of no growth
for growth's sake. Cash and cash equivalents increased $2,378,627, or 9.1%, from
$26,164,212 at December 31, 1995 to $28,542,839 at December 31, 1996. The
increase in cash and cash equivalents is primarily due to an increase in federal
funds sold and securities purchased under resale agreements which is offset by a
decline in investment securities. Investment securities declined $10,130,284, or
28.9%, from $34,982,653 at December 31, 1995 to $24,852,369 at December 31,
1996. The primary reason for the decline in investment securities is
reallocation into other earning asset categories, specifically federal funds
sold and securities purchased under resale agreements and loans.
SOURCES OF FUNDS
The Company had total deposits at December 31, 1996, of $183,431,500
compared to $179,204,795 at December 31, 1995. The principal source of the
increase in total deposits was in interest bearing deposits which increased
$3,241,011, or 3.7%, from $87,201,532 at December 31, 1995, to $90,442,543 at
December 31, 1996. The primary reason for the overall increase was growth in
core deposits. The Company continues to maintain local commercial deposits by
providing a secure, stable presence in its market area. Substantially all of the
Company's deposits are local, core deposits. The Company does not have any out-
of-area brokered deposits included in the deposit base. The Company continues to
emphasize core deposits and has elected not to compete for volatile deposits
with increased rates.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the difference between interest and fees earned on
earning assets and interest paid on deposits and other sources of funds, has
continued to be challenged by deregulation through increased competition and
market conditions. The Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities. It is also affected
E-27
<PAGE>
by changes in yields earned on interest-earning assets and rates paid on
deposits and borrowed funds. Net interest income in 1996 was $12,029,588
compared to $11,456,120 in 1995 and $9,946,446 in 1994. The Company is
consistent in its' ability to maintain a strong net interest income position
with the increase in 1996 a result of an increase in earning assets. Interest
earning assets averaged $175,954,000 in 1996 compared to $162,875,000 in 1995,
which represents an increase of $13,079,000, or 8.03%. Loans, the largest
component of interest earning assets, averaged $133,951,000 for the year ended
December 31, 1996 compared to $118,986,000 for the year ended December 31, 1995.
Net interest income, when expressed as a percentage of average total interest
earning assets, is referred to as the net interest margin. The Company's net
interest margin decreased slightly to 6.84% in 1996 from 7.03% in 1995 and 6.56%
in 1994. Net interest spread, the effective rate of interest income on earning
assets less the effective rate of interest expense on deposits, decreased to
5.30% in 1996 from 5.75% in 1995 and 5.47% in 1994.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses is a general reserve established by management
to absorb potential losses inherent in the entire loan portfolio. In evaluating
the adequacy of the allowance, management gives consideration to the Company's
loan loss experience, the performance of loans in the Company's portfolio, the
quality of the loans in the Company's portfolio, evaluation of collateral for
such loans, the economic conditions affecting collectibility of loans, the
prospects and financial condition of the respective borrowers or guarantors and
such other factors which in management's judgment deserve recognition in the
estimation of loan losses. During 1996, $1,159,269 was provided for loan losses
compared to $312,596 provided during 1995 and $1,088,000 provided during 1994.
The substantial provision for loan losses in 1994 compared to 1995 was
necessitated by high levels of non-performing and classified loans and loan
charge-offs. The increase in the provision from 1995 to 1996 is primarily due to
problem asset resolution which is reflected in the reduction of nonperforming
assets. Of the $1,159,269 provided for loan losses in the year ended December
31, 1996, approximately $435,000 was provided in the fourth quarter to allow for
a $350,000 charge-off. Net charge-offs for 1996, 1995 and 1994 were
approximately $1,424,984, $533,833, and $1,530,355, respectively. The allowance
for loan losses at December 31, 1996 was approximately $2,738,000, or 1.9% of
total loans, as compared to $3,003,000, or 2.30% of total loans at December 31,
1995. Non-performing loans, loans which are no longer accruing interest,
decreased $2,963,433, or 43.9%, to $3,782,539 at December 31, 1996 compared to
$6,745,972 at December 31, 1995. Of the $3,782,539 in non-performing loans at
December 31, 1996, there were no loans on cash basis nonaccrual. At December 31,
1995, of the $6,745,972 in non-performing loans $2,686,978 were on cash basis
nonaccrual with all payments received as agreed. The primary reason for the
decrease in non-performing loans was the continued improvement in the overall
loan portfolio. As a result of the Federal Deposit Insurance Corporation
("FDIC") examination at December 31, 1993, the Bank and FDIC executed a
Memorandum of Understanding ("FDIC Memorandum") dated August 3, 1994.
Based upon the January 8, 1996, FDIC examination of the Bank as of November
30, 1995, the Bank was formally notified that the FDIC Memorandum dated August
3, 1994, was removed effective May 22, 1996. Subsequent to the removal of the
FDIC Memorandum, the Board of Directors of the Bank approved a resolution which
required Bank management to maintain certain performance standards. As a result
of an examination conducted by the California State Banking Department (the
"Department") as of December 31, 1993, the Bank and the Department executed a
Memorandum of Understanding which was dated January 31, 1995, which was
subsequently terminated June 12, 1996.
Based upon an examination as of March 31, 1994, by the Federal Reserve Bank
of San Francisco ("FRB"), the Company and the FRB executed a Memorandum of
Understanding dated October 24, 1994. Following adoption of certain resolutions
on November 19, 1996, the FRB terminated the Memorandum of Understanding
effective December 3, 1996.
E-28
<PAGE>
OTHER OPERATING INCOME
Other operating income, which includes income derived from service charges
on deposit accounts, loan servicing fees and other fees and charges, and gain
(loss) on sale of securities, overall increased slightly to $1,189,483 in 1996,
from $1,145,756 in 1995 and $1,131,210 in 1994. Service charges on deposit
accounts improved modestly in 1996 over 1995 and 1994. However, the net increase
from 1994 to 1995 is primarily a result of gains on sale of securities in 1995
which did not occur in 1994. The Company recorded gain on sale of securities of
$18,750 and $54,044 in year ended December 31, 1996 and 1995, respectively, and
a loss of $734 in year ended December 31, 1994. Gain (loss) on sale of
securities is a result of the sale of securities held in the available for sale
category for the purpose of improving liquidity.
NONINTEREST EXPENSE
The 1.85% decrease in total noninterest expense in 1996 to $10,180,256 from
$10,371,746 at December 31, 1995, is primarily in other real estate expense and
other operating expense. Other real estate expense declined in 1996 as a result
of the decrease in other real estate which decreased from $516,431 at December
31, 1995 to $328,952 at December 31, 1996. Other operating expense decreased
$194,028 to $3,095,603 in 1996 compared to $3,289,631 in 1995 and $3,087,826 in
1994. The Company experienced an increase in other operating expense in 1995
primarily due to a loss of approximately $295,000 which resulted from the
settlement of a lawsuit. As a percentage of average total assets, total
noninterest expense declined to 5.21% in 1996, compared to 5.72% in 1995 and
5.65% in 1994.
NET INCOME
The Company reported net income of $1,196,546 in 1996, or $0.83 per share,
compared to $1,238,534, or $0.88 per share, in 1995 and $157,940, or $0.11 per
share, in 1994. The share and per share data information has been adjusted for
5% stock dividends issued on April 19, 1996 and October 1, 1994. Supported by an
expansion economy, the Company's earnings performance in 1996 was primarily a
result of growth in interest earning assets coupled with improved credit quality
and decreasing other noninterest expense.
INCOME TAXES
In 1996, 1995 and 1994, the Company recorded a tax provision of $683,000,
$679,000 and $20,000, respectively.
ASSET--LIABILITY MANAGEMENT
The Company relies on asset--liability management to assure adequate
liquidity, maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities, and plan and control asset and
liability mixes, volumes, maturities, yields and rates for maximization of
interest margins. Liquidity management and interest rate sensitivity management
are key factors in asset--liability management. Liquidity management involves
the ability to meet expected and potential cash flow requirements of customers
who may be either depositors wanting to withdraw funds or borrowers needing
assurances that sufficient funds will be available to meet their credit needs.
Interest rate sensitivity management seeks to avoid fluctuating interest margins
and to enhance consistent growth of net interest income through periods of
changing interest rates.
The Company's Asset--Liability Management Committee manages the liquidity
position, the parameters of which are approved by the Board of Directors. The
liquidity position of the Company is monitored daily and the Company had liquid
assets (cash, federal funds sold, securities purchased under agreements to
resale, deposits in other financial institutions and investment securities) as a
percent of total deposits of 29.4% and 34.4% as of December 31, 1996 and 1995,
respectively. The Company's Investment Committee
E-29
<PAGE>
manages the investment portfolio, based upon the Investment Policy which is
approved by the Board of Directors.
The Bank's goal is to maintain federal funds sold at $7 to $10 million
dollars on average with minimum daily investments monitored closely. Deposits
with other institutions and securities purchased under agreements to resale will
be maintained as alternative short-term investment products. Management's
intention is to maintain an investment portfolio which contributes an adequate
rate of return with minimal market or credit risk.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Harbor Bank intends to maintain
interest-earning assets, comprised of both loans and investments, and
interest-bearing liabilities, comprised primarily of deposits, maturing or
repricing evenly in order to eliminate any impact from interest rate changes. In
the event of a change in interest rates, 40.66% of the loan portfolio at
December 31, 1996 would immediately reprice, with 14.40% repricing within the
next twelve months. 47.7% of the deposit liabilities would reprice immediately
or within twelve months, with the remaining 50.7% of deposit liabilities being
in noninterest bearing demand accounts.
CAPITAL RESOURCES
Management seeks to maintain a level of capital adequate to support
anticipated asset growth and credit risks and to ensure that the Company is
within established regulatory guidelines and industry standards. The Company's
capital plan for 1997 contemplates continued growth in stockholders' equity
through the retention of net income. Minimum capital ratios required under the
risk-based capital regulations are 4.0% for Tier 1 Capital and 8.0% for Total
Capital. As of December 31, 1996, the Company had Tier 1 Capital of 10.33% and
Total Capital of 11.58%.
E-30
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
E-31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement Schedules
Covered by Report of Independent Public Accountants.
<TABLE>
<CAPTION>
REFERENCE PAGE
- -------------------------------------------------------------------------------------- ---------
<S> <C>
Report of Ernst & Young, LLP, Auditors................................................ 50
Consolidated Balance Sheets at
December 31, 1996 and 1995.......................................................... 51-52
Consolidated Statements of Income for the
years ended December 31, 1996, 1995 and 1994........................................ 53-54
Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994....................................................................... 55
Consolidated Statements of Cash Flows
for the years ended December 31, 1996
1995 and 1994....................................................................... 56-57
Notes to Consolidated Financial Statements............................................ 58-79
</TABLE>
All schedules are omitted since the required information is not present or
not present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Statements or
Notes thereto.
E-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Harbor Bancorp
We have audited the accompanying consolidated balance sheets of Harbor
Bancorp and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Harbor Bancorp
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
January 31, 1997
E-33
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 20,142,839 $ 20,964,212
Federal funds sold and securities purchased under resale agreements.............. 8,400,000 5,200,000
-------------- --------------
Cash and cash equivalents...................................................... 28,542,839 26,164,212
Time certificates of deposit..................................................... 495,000 495,000
Investment securities:
Held to maturity (fair value of $6,094,994 in 1996 and $10,190,673 in
1995)(Notes 1 and 2)......................................................... 6,064,736 10,187,147
Available for sale............................................................. 18,787,633 24,795,506
Loans (Notes 1 and 3)............................................................ 143,987,787 130,412,144
Less allowance for loan losses (Notes 1 and 4)................................. 2,737,516 3,003,231
-------------- --------------
Net loans.................................................................... 141,250,271 127,408,913
Bank premises and equipment (Note 1):
Land........................................................................... 159,000 159,000
Buildings and improvements..................................................... 4,249,367 4,068,049
Furniture, fixtures and equipment.............................................. 3,571,799 3,427,932
-------------- --------------
7,980,166 7,654,981
Less accumulated depreciation and amortization................................. 6,131,924 5,726,982
-------------- --------------
1,848,242 1,927,999
Other real estate................................................................ 328,952 516,431
Accrued interest receivable...................................................... 856,536 997,564
Other assets..................................................................... 1,929,286 2,599,357
-------------- --------------
Total assets................................................................. $ 200,103,495 $ 195,092,129
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest bearing (Notes 1 and 5)............................................... $ 90,442,543 $ 87,201,532
Noninterest bearing............................................................ 92,988,957 92,003,263
-------------- --------------
Total deposits............................................................... 183,431,500 179,204,795
Accrued expenses and other liabilities........................................... 972,013 1,330,907
-------------- --------------
Total liabilities............................................................ 184,403,513 180,535,702
Commitments and contingencies (Note 9)........................................... -- --
Stockholders' equity (Notes 1, 7, and 8):
Common stock, no par value; 5,000,000 shares authorized; issued and
out-standing, 1,415,214 shares in 1996 and 1,348,021 shares in 1995 13,963,517 13,257,875
Retained earnings................................................................ 1,870,619 1,381,899
Unrealized losses on securities available for sale, net of tax................. ( 134,154) (83,347)
-------------- --------------
Total stockholders' equity................................................... 15,699,982 14,556,427
-------------- --------------
Total liabilities and stockholders' equity................................. $ 200,103,495 $ 195,092,129
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
E-34
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans........................................ $ 12,749,764 $ 11,502,305 $ 10,319,644
Interest on investment securities................................. 1,397,555 1,760,002 1,010,920
Other interest.................................................... 940,770 835,458 621,999
------------- ------------- -------------
Total interest income........................................... 15,088,089 14,097,765 11,952,563
Interest expense:
Interest on deposits.............................................. 3,055,081 2,597,912 1,933,993
Interest on other borrowed funds.................................. 3,420 43,733 72,124
------------- ------------- -------------
Total interest expense.......................................... 3,058,501 2,641,645 2,006,117
------------- ------------- -------------
Net interest income................................................. 12,029,588 11,456,120 9,946,446
Provision for loan losses (Notes 1 and 4)........................... 1,159,269 312,596 1,088,000
------------- ------------- -------------
Net interest income after provision for loan losses................. 10,870,319 11,143,524 8,858,446
Other operating income:
Service charges on deposit accounts............................... 964,664 920,240 905,017
Loan servicing fees and other fees and charges.................... 206,069 171,472 226,927
Gain (loss) on sale of securities................................. 18,750 54,044 (734)
------------- ------------- -------------
Total other operating income.................................... 1,189,483 1,145,756 1,131,210
Noninterest expense:
Salaries, wages and employee benefits............................. 3,781,418 3,605,859 3,244,680
Occupancy expenses................................................ 2,177,900 2,152,163 1,969,795
Equipment expenses................................................ 396,256 306,689 331,410
Data processing expenses.......................................... 555,108 630,077 585,606
Other real estate expenses........................................ 173,971 387,327 592,399
Other operating expenses.......................................... 3,095,603 3,289,631 3,087,826
------------- ------------- -------------
Total noninterest expense....................................... 10,180,256 10,371,746 9,811,716
------------- ------------- -------------
Income before income taxes.......................................... 1,879,546 1,917,534 177,940
Income taxes (Notes 1 and 6)........................................ 683,000 679,000 20,000
------------- ------------- -------------
Net income........................................................ $ 1,196,546 $ 1,238,534 $ 157,940
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares and common share
equivalents....................................................... 1,434,245 1,415,214 1,415,214
------------- ------------- -------------
------------- ------------- -------------
Net income per common share (Note 1).............................. $ 0.83 $ 0.88 $ 0.11
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
E-35
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
NUMBER OF AVAILABLE FOR
SHARES RETAINED SALE, NET OF
OUTSTANDING COMMON STOCK EARNINGS TAX TOTAL
----------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994............ 1,284,023 $ 12,841,888 $ 402,733 $ (148,669) $ 13,095,952
Adjustment to beginning balance for
change in accounting method, net of
tax................................. -- -- -- 11,175 11,175
5% stock dividend..................... 63,998 415,987 (417,308) -- (1,321)
Change in unrealized gains (losses) on
securities available for sale, net
of tax.............................. -- -- -- (128,816) (128,816)
Net income............................ -- -- 157,940 -- 157,940
----------- ------------- ------------ -------------- -------------
Balance at December 31, 1994.......... 1,348,021 $ 13,257,875 $ 143,365 $ (266,310) $ 13,134,930
Change in unrealized gains (losses) on
securities available for sale, net
of tax.............................. -- -- -- 182,963 182,963
Net income............................ -- -- 1,238,534 -- 1,238,534
----------- ------------- ------------ -------------- -------------
Balance at December 31, 1995.......... 1,348,021 $ 13,257,875 $ 1,381,899 $ (83,347) $ 14,556,427
5% stock dividend..................... 67,193 705,642 (707,826) -- (2,184)
Change in unrealized gains (losses) on
securities available for sale, net
of tax.............................. -- -- -- (50,807) (50,807)
Net income............................ -- -- 1,196,546 -- 1,196,546
----------- ------------- ------------ -------------- -------------
Balance at December 31, 1996.......... 1,415,214 $ 13,963,517 $ 1,870,619 $ (134,154) $ 15,699,982
----------- ------------- ------------ -------------- -------------
----------- ------------- ------------ -------------- -------------
</TABLE>
See notes to consolidated financial statements.
E-36
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income..................................................... $ 1,196,546 $ 1,238,534 $ 157,940
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation and amortization.................. 483,609 480,108 539,259
Provision for loan losses.................................... 1,159,269 312,596 1,088,000
(Gain) loss on sale of investment securities................. (18,750) (54,044) 734
Decrease (increase) in interest receivable................... 141,028 (25,237) 1,542
(Decrease) increase in interest payable...................... (4,772) (4,023) 38,649
Provision for deferred income taxes.......................... 210,000 1,000 (10,000)
Other........................................................ (47,378) (494,554) (812,220)
-------------- -------------- --------------
Net cash provided by operating activities.................. 3,119,552 1,454,380 1,003,904
Investing activities:
Investment securities held to maturity:
Purchases.................................................... (2,212,780) (16,295,523) (1,598,633)
Proceeds from maturities..................................... 6,272,169 15,688,858 --
Investment securities available for sale:
Purchases.................................................... (34,905,252) (34,877,417) (38,324,772)
Proceeds from sale........................................... 3,018,750 6,995,550 4,978,000
Proceeds from maturities..................................... 38,000,000 29,000,000 42,274,008
Net decrease in short-term securities.......................... -- -- 396,000
Net (increase) decrease in loans............................... (15,000,627) (16,095,734) 4,127,171
Capital expenditures........................................... (325,185) (473,184) (230,240)
Sales of other real estate..................................... 187,479 2,297,854 770,403
-------------- -------------- --------------
Net cash (used in) provided by investing activities.......... (4,965,446) (13,759,596) 12,391,937
</TABLE>
E-37
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Financing activities:
Net increase (decrease) in commercial and other demand deposits,
savings, money market deposits, and certificates of deposit.... 4,226,705 17,092,881 (13,889,647)
Cash dividends and cash paid in lieu of fractional shares.......... (2,184) -- (1,321)
------------- ------------- --------------
Net cash provided by (used in) financing activities............ 4,224,521 17,092,881 (13,890,968)
Increase (decrease) in cash and cash equivalents............... 2,378,627 4,787,665 (495,127)
Cash and cash equivalents at beginning of year..................... 26,164,212 21,376,547 21,871,674
------------- ------------- --------------
Cash and cash equivalents at end of year........................... $ 28,542,839 $ 26,164,212 $ 21,376,547
------------- ------------- --------------
------------- ------------- --------------
<CAPTION>
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest..................................................... $ 3,063,273 $ 2,645,668 $ 1,967,468
Income taxes................................................. 460,260 700,000 244,211
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure........ $ 1,597,000 $ 725,000 $ 1,377,593
Unrealized (losses) gains on securities available for sale, net
of tax....................................................... (50,807) 182,963 (117,641)
</TABLE>
See notes to consolidated financial statements.
E-38
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all the accounts of Harbor
Bancorp ("Company") and its wholly owned subsidiaries, Harbor Bank ("Bank") and
Harbor Bank Properties. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Investment securities
The Company adopted Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of January
1, 1994.
Investment securities held to maturity are securities which the Company has
the positive intent and ability to hold until maturity. Accordingly, these
securities are carried at amortized cost. Unrealized holding gains and losses
are not recognized in the financial statements until realized or until a decline
in fair value below cost is deemed to be other than temporary. Investment
securities available for sale include debt securities and mutual funds. These
securities are stated at fair value with unrealized holding gains and losses
reflected as a separate component of stockholders' equity, net of income taxes.
Gains and losses are determined on the specific indentification method. Any
decline in the fair value of the investments which is deemed to be other than
temporary is charged against current earnings.
LOANS
Loans receivable that management has the positive intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
NONACCRUAL LOANS
Nonaccrual loans are loans on which accrual of interest has been suspended.
Interest is suspended on all real estate loans when, in management's judgement,
the interest will not be collectible in the normal course of business or when
the loan is 90 days or more past due or full collection of principal is not
assured. When a loan is placed on nonaccrual, interest accrued is reversed
against interest income.
IMPAIRED LOANS
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," ("SFAS 114") as amended, effective January 1, 1995. This statement
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective
E-39
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest rates or the fair value of the underlying collateral, and specifies
alternative methods for recognizing interest income on loans that are impaired
or for which there are credit concerns. For purposes of applying this standard,
impaired loans have been defined as all nonaccrual loans. The Company's policy
for income recognition was not affected by adoption of the standard. The
adoption of SFAS 114 did not have any effect on the total allowance for loan
losses or related provision.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's evaluation of the
quality of the loan portfolio. The allowance is maintained at a level considered
to be adequate for potential loan losses based on management's assessment of
various factors affecting the loan portfolio, which includes a review of problem
loans and general business conditions. The allowance is increased by the
provision for loan losses charged to operations and reduced by loans charged off
to the allowance, net of recoveries.
OTHER REAL ESTATE
Other real estate ("ORE") is stated at the lower of cost or fair market
value, net of estimated selling costs.
INCOME TAXES
Income tax expense is the current and deferred tax consequence, of events
that have been recognized in the financial statements, as measured by the
provisions of enacted tax law. The Company files consolidated federal and state
tax returns with all its subsidiaries.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the related assets
which range from 10 to 30 years for buildings and improvements and 3 to 10 years
for furniture, fixtures and equipment.
NET INCOME PER COMMON SHARE
Net income per common share is based on average shares outstanding during
each year plus the net effect of dilutive stock options.
TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit of $100,000 or more totaled $23,828,595 at
December 31, 1996 and $15,278,000 at December 31, 1995.
RESERVE REQUIREMENTS
The Bank is required to maintain a balance with the Federal Reserve Bank
based on a percentage of deposit liabilities. At December 31, 1996, the required
balance was $4,653,000.
E-40
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents include amounts due from banks, federal funds sold and
securities purchased under resale agreements. Generally, federal funds are
purchased and sold for one-day periods. Securities purchased under resale
agreements generally have a contracted term of one day.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair values.
Investment securities: Estimated fair values are based on quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans (e.g., commercial real estate and commercial and
industrial loans) are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest approximates
its fair value.
Deposits: The fair values disclosed for demand deposits (e.g., interest and
non-interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposits
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities held
to maturity are as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government corporations and
agencies............................... $ 5,521,161 $ 41,370 $ 12,862 $ 5,549,669
Obligations of states and political
subdivisions........................... 543,575 6,533 4,783 545,325
------------ ----------- ----------- ------------
Totals............................... $ 6,064,736 $ 47,903 $ 17,645 $ 6,094,994
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
E-41
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government corporations and
agencies............................. $ 9,848,726 $ 46,677 $ 43,320 $ 9,852,083
Obligations of states and political
subdivisions......................... 338,421 7,343 7,174 338,590
------------- ----------- ----------- -------------
Totals............................. $ 10,187,147 $ 54,020 $ 50,494 $ 10,190,673
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and estimated fair value of investment securities held to
maturity at December 31, 1996, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 934,070 $ 933,098
Due after one year through five years............................. 2,229,844 2,245,518
Due after five years through ten years............................ 414,130 418,319
Due after ten years............................................... 2,486,692 2,498,059
------------ ------------
$ 6,064,736 $ 6,094,994
------------ ------------
------------ ------------
</TABLE>
There were no sales of investment securities held to maturity in 1996, 1995
and 1994.
The amortized cost and estimated fair values of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government corporations and
agencies............................. $ 17,990,897 $ -- $ 2,580 $ 17,988,317
Mutual funds........................... 1,000,000 -- 200,684 799,316
------------- ----------- ----------- -------------
Totals............................. $ 18,990,897 $ -- $ 203,264 $ 18,787,633
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
E-42
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government corporations and
agencies............................. $ 23,921,790 $ 53,059 $ 12,271 $ 23,962,578
Mutual funds........................... 1,000,000 -- 167,072 832,928
------------- ----------- ----------- -------------
Totals............................. $ 24,921,790 $ 53,059 $ 179,343 $ 24,795,506
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and estimated fair value of investment securities
available for sale at December 31, 1996, by contractual maturity, are shown
below.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 17,990,897 $ 17,988,317
Due after one year through five years.......................... -- --
Mutual funds................................................... 1,000,000 799,316
------------- -------------
$ 18,990,897 $ 18,787,633
------------- -------------
------------- -------------
</TABLE>
Gross gains of $18,750 were realized on those investment securities
available for sale sold in 1996, (taxes related to investment securities
available for sale gains in 1996 were $6,948). Gross gains of $54,044 were
realized on those investment securities available for sale sold in 1995, (taxes
related to investment securities available for sale gains in 1995 were $24,320).
Gross losses of $734 were realized on those investment securities available for
sale sold in 1994, (taxes related to investment securities available for sale
losses in 1994 were $303). Proceeds from the sale of investment securities
available for sale were $3,018,750 in 1996, $6,995,550 in 1995 and $4,978,000 in
1994. Maturities of mortgage-backed securities are classified in accordance with
the contractual repayment schedules. Expected maturities differ from the
contractual maturities reported above because investment security issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
The Company has pledged certain investment securities with a fair value of
$1,459,983 to secure treasury, tax and loan, bankruptcy and public deposits at
December 31, 1996.
E-43
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. LOANS
The composition of the Company's loan portfolio at December 31, 1996 and
1995 is as follows (rounded to nearest thousand):
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Commercial................................................... $ 50,523,000 $ 51,528,000
Commercial--real estate secured.............................. 69,295,000 53,434,000
Real estate--mortgage........................................ 17,021,000 16,127,000
Real estate--construction.................................... 789,000 3,412,000
Installment.................................................. 6,360,000 5,911,000
-------------- --------------
$ 143,988,000 $ 130,412,000
-------------- --------------
-------------- --------------
</TABLE>
The majority of loans, excluding installment loans, have variable interest
rates related to the prime interest rate. Installment loans have fixed interest
rates.
All of the Company's business is conducted in Southern California, with
individuals and small and medium-sized businesses. These relationships are
targeted to the geographic area in which management is familiar with real estate
and economic trends.
In the normal course of business, the Company has made loans to directors
and employees. Such loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Loans outstanding to directors and employees at
December 31, 1995 totaled approximately $2,519,617. During 1996, new loans of
approximately $193,573 were made and principal payments approximating $325,960
were received resulting in a balance outstanding at December 31, 1996 of
approximately $2,387,230.
Loan commitments are made to accommodate the financial needs of the
Company's customers. Letters of credit commit the Company to make payments on
behalf of customers when certain specified events occur. Both arrangements have
credit risk essentially the same as that involved in extending loans to
customers and are subject to the Company's normal credit policies and review.
Collateral is obtained based on management's credit assessment of the borrower.
The amount of credit risk is represented by the face amount of the commitments
and letters of credit.
At December 31, 1996, the Company had outstanding commitments to its
customers on letters of credit of approximately $1,801,214 and unfunded
nonrevolving loan commitments of $1,644,941.
The recorded investment in loans considered impaired under SFAS 114 was
$5,663,729 at December 31, 1996, with a valuation reserve of $895,466 and was
$6,745,972 at December 31, 1995 with a valuation reserve of $858,962. For the
year ended December 31, 1996, the average recorded investment in impaired loans
was approximately $6,923,705 and, for year ended December 31, 1995, the average
recorded investment in impaired loans was approximately $4,888,800. Cash basis
interest income recognized on those loans during the year was immaterial for
1995 and 1996.
At December 31, 1996, 1995 and 1994, the Company had $3,782,539, $6,745,972,
and $5,739,511, respectively, of loans which were considered to be nonperforming
loans and on which the Company ceased its accrual of interest. Interest income
which would have been recognized in 1996, 1995 and 1994 on
E-44
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. LOANS (CONTINUED)
nonperforming loans was $172,713, $260,264, and $166,308, respectively. At
December 31, 1996, approximately 59.19%, or $2,238,829, of nonaccrual loans were
part of a single lending relationship. Although income is not being recognized
on an accrual or cash basis on the loans within this relationship, the borrower
continues to make all payments as agreed on all but 2% of the loans.
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses during each of the three years in
the period ended December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 3,003,231 $ 3,224,468 $ 3,666,823
Provision charged to expense...................... 1,159,269 312,596 1,088,000
Recoveries on loans previously charged off........ 79,116 18,620 44,031
Loans charged off................................. (1,504,100) (552,453) (1,574,386)
------------- ------------ -------------
Balance at end of year............................ $ 2,737,516 $ 3,003,231 $ 3,224,468
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
5. DEPOSITS
Deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
NOW and money market......................................... $ 42,969,400 $ 49,253,838
Savings deposits............................................. 10,696,191 11,514,091
Certificate of deposits...................................... 36,776,952 26,433,603
Demand deposit accounts...................................... 92,988,957 92,003,263
-------------- --------------
$ 183,431,500 $ 179,204,795
-------------- --------------
-------------- --------------
</TABLE>
Accrued interest payable for the following deposit categories at December
31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
NOW and money market.................................................. $ 6,161 $ 12,849
Savings deposits...................................................... -- 1,421
Certificate of deposits............................................... 170,491 167,782
Demand deposit accounts............................................... -- --
---------- ----------
$ 176,652 $ 182,052
---------- ----------
---------- ----------
</TABLE>
E-45
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. DEPOSITS (CONTINUED)
At December 31, 1996, the scheduled maturities of certificates of deposits
are as follows:
1997.................................. $ 33,763,707
1998.................................. 2,997,961
1999.................................. 15,284
2000.................................. --
2001 and thereafter................... --
------------
$ 36,776,952
------------
------------
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
1996:
Current................................................. $ 470,000 $ 3,000 $ 473,000
Deferred................................................ 159,000 51,000 210,000
---------- ----------- ----------
$ 629,000 $ 54,000 $ 683,000
1995:
Current................................................. $ 536,000 $ 142,000 $ 678,000
Deferred................................................ 119,000 (118,000) 1,000
---------- ----------- ----------
$ 655,000 $ 24,000 $ 679,000
1994:
Current................................................. $ 105,000 $ (75,000) $ 30,000
Deferred................................................ (20,000) 10,000 (10,000)
---------- ----------- ----------
$ 85,000 $ (65,000) $ 20,000
</TABLE>
The deferred tax expense (benefit) represent the changes in the amounts of
temporary differences from January 1 to December 31 of 1996, 1995 and 1994,
respectively. The types of temporary differences that give rise to significant
portions of the deferred tax at December 31, 1996, 1995 and 1994, include
reserves for credit losses, other real estate and fixed assets. The amounts
previously reported as the current and deferred portions of income tax expense
for 1995 have been revised. Such changes to the components occur because all tax
alternatives available to the Company are not known for a number of months
subsequent to year end.
E-46
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. INCOME TAXES (CONTINUED)
The effective federal income tax rate varies from the statutory rate due to
a number of factors including certain interest exclusions for state income tax
purposes. A reconciliation of the differences between statutory and effective
tax rates follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax based on statutory rate................ $ 639,000 $ 652,000 $ 60,000
State income tax net of federal income tax................ 69,000 16,000 (34,000)
Other..................................................... (25,000) 11,000 ( 6,000)
---------- ---------- ----------
$ 683,000 $ 679,000 $ 20,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The tax effects of temporary differences which give rise to significant
elements of deferred tax assets and liabilities as of December 31, 1996 and 1995
are detailed below:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Gross deferred assets
Loan loss reserve............................................... $ 809,000 $ 927,000
Other real estate............................................... 63,000 40,000
Unrealized securities losses.................................... 69,000 43,000
Fixed assets.................................................... 51,000 --
Other........................................................... 53,000 22,000
------------ ------------
Total deferred assets......................................... $ 1,045,000 $ 1,032,000
Gross deferred liabilities
Fixed assets.................................................. $ -- (29,000)
------------ ------------
Net deferred tax asset............................................ $ 1,045,000 $ 1,003,000
------------ ------------
------------ ------------
</TABLE>
7. STOCK OPTIONS
The Company sponsors a stock option plan covering directors and officers and
other key full-time salaried employees. Approximately 90,295 shares have been
authorized under the plan, 44,793 of which were available at December 31, 1996
for future grants. Generally, the options become exercisable one year following
the date of grant in cumulative equal amounts over five years at which time any
options not exercised expire.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of Harbor Bancorp
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
E-47
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. STOCK OPTIONS (CONTINUED)
The Company's stock option activity and related information for the periods
ended December 31, 1996 and December 31, 1995, is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period...................................... 55,100 $ 7.59 41,676 $ 7.34
Granted................................................................. 10,000 10.00 25,000 7.90
Exercised............................................................... -- --
Forfeited/expired....................................................... -- -- (11,576) 7.34
5% dividend issued 4/19/96.............................................. 3,253 -- -- --
----------- ---------
Outstanding at end of period............................................ 68,353 $ 7.59 55,100 $ 7.59
----------- ---------
----------- ---------
Exercisable at end of period............................................ 26,307
-----------
-----------
</TABLE>
The weighted-average fair value of options granted during 1996 and 1995 were
$4.85 and $3.76, respectively.
Exercise prices for options outstanding as of December 31, 1996, ranged from
$6.99 to $9.52. The weighted-average remaining contractual life of these options
is 3.08 years.
The fair value of the options presented above was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free interest
rates of 6.75% and 6.25%; a volatility factor of the expected market price of
Harbor Bancorp stock of .378; and a weighted-average expected option life of 6
years. The pro forma earnings per share disclosure required by SFAS 123 are not
shown as the pro forma impact of applying SFAS 123 is insignificant in 1996.
8. EMPLOYEE STOCK BONUS PLAN
The Company has an employee stock bonus plan which covers substantially all
employees. The Company may make annual contributions, subject to the approval of
the Board of Directors. Contributions were $90,000 in 1996, 1995 and 1994.
9. COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations in leased facilities under
noncancellable operating leases expiring at various dates through 2004, at which
time the leases are renewable at the then fair rental value for periods of five
to ten years. Total future minimum sublease rentals amount to approximately
$445,793 at December 31, 1996.
E-48
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The minimum rental commitments for operating leases, excluding sublease
income, are approximately as follows:
Year ending December 31:
1997................................ 1,764,000
1998................................ 1,764,000
1999................................ 1,710,000
2000................................ 1,580,000
2001................................ 1,285,000
Thereafter............................ 2,365,000
------------
$ 10,468,000
------------
------------
Rental expense for the three years ended December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rentals..................................... $ 1,884,000 $ 1,791,000 $ 1,878,000
Sublease rentals.................................... (298,000) (259,000) (333,000)
------------ ------------ ------------
$ 1,586,000 $ 1,532,000 $ 1,545,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Due to the nature of their business, the Company, the Bank and their
subsidiaries are subject to legal actions threatened or filed which arise from
the normal course of their business. Management believes that such litigation is
incidental to the business of the Company and the Bank and the eventual outcome
of all currently pending legal proceedings will not be material to the Company's
financial position or results of operations.
10. REGULATORY CAPITAL
The Company and its bank subsidiary are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31, 1996,
that the Company and the Bank meets all capital adequacy requirements to which
it is subject.
E-49
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. REGULATORY CAPITAL (CONTINUED)
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation (the "FDIC") categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain total risk-based, Tier 1
risk-based, Tier 1 Leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. There was no deduction made from capital for interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Company........................................ $ 17,355 11.58% $ 11,986 8.00% $ 14,982 10.00%
Bank........................................... 17,159 11.35% 12,093 8.00% 15,116 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Company........................................ $ 15,472 10.33% $ 5,993 4.00% $ 8,989 6.00%
Bank........................................... 15,270 10.10% 6,046 4.00% 9,070 6.00%
Tier 1 Capital (to Average Assets):
Company........................................ $ 15,472 7.63% $ 8,116 4.00% $ 10,145 5.00%
Bank........................................... 15,270 7.53% 8,112 4.00% 10,140 5.00%
As of December 31, 1995
Total Capital (to Risk-Weighted Assets):
Company........................................ $ 15,944 11.56% $ 11,029 8.00% $ 13,787 10.00%
Bank........................................... 15,748 11.55% 10,903 8.00% 13,629 10.00%
Tier 1 Capital (to Risk-Weighted Assets):
Company........................................ $ 14,221 10.31% $ 5,515 4.00% $ 8,272 6.00%
Bank........................................... 14,044 10.30% 5,452 4.00% 8,357 6.00%
Tier 1 Capital (to Average Assets):
Company........................................ $ 14,221 7.09% $ 8,021 4.00% $ 10,026 5.00%
Bank........................................... 14,044 7.04% 7,980 4.00% 9,975 5.00%
</TABLE>
E-50
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. CONDENSED FINANCIAL STATEMENTS
The following are condensed financial statements of Harbor Bancorp (parent
only):
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Assets:
Cash......................................................... $ 14,392 $ 20,437
Investment in Harbor Bank.................................... 15,566,287 14,379,680
Investment in Harbor Bank Properties......................... 25,227 25,052
Other assets................................................. 94,076 131,258
------------- -------------
Total assets............................................... $ 15,699,982 $ 14,556,427
------------- -------------
------------- -------------
Stockholders' equity:
Common stock, no par value................................... $ 13,963,517 $ 13,257,875
Retained earnings............................................ 1,736,465 1,298,552
------------- -------------
Total stockholders' equity................................. $ 15,699,982 $ 14,556,427
------------- -------------
------------- -------------
</TABLE>
INCOME STATEMENTS OF
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiaries...... $ 1,237,589 $ 1,279,964 $ 162,505
Miscellaneous income................................ 61 -0- 14,725
------------ ------------ ----------
Total income...................................... $ 1,237,650 $ 1,279,964 $ 177,230
Operating expense................................... 41,104 41,430 19,290
------------ ------------ ----------
Net income........................................ $ 1,196,546 $ 1,238,534 $ 157,940
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
E-51
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. CONDENSED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
Operating activities:
Net income....................................... $ 1,196,546 $ 1,238,534 $ 157,940
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed income of
subsidiaries................................. (1,237,589) (1,279,964) (162,505)
Decrease in interest receivable................ -- -- 306
Other assets................................... 37,182 31,140 (109,182)
------------- ------------- -----------
Net cash used in operating activities........ (3,861) (10,290) (113,441)
Financing activities:
Fractional shares................................ (2,184) -- (1,321)
------------- ------------- -----------
Net cash used in financing activities........ (2,184) -- (1,321)
Decrease in cash................................... (6,045) (10,290) (114,762)
Cash at beginning of year.......................... 20,437 30,727 145,489
------------- ------------- -----------
Cash at end of year................................ $ 14,392 $ 20,437 $ 30,727
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
DIVIDEND RESTRICTION
The Company is dependent to a significant degree on dividends from its
subsidiaries. There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. Retained earnings of
subsidiaries available for dividends to the Company approximated $2,720,057 at
December 31, 1996.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value, are reported using quoted market prices. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instrument. Fair values for certain financial
instruments and all non-financial instruments are not required to be disclosed.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
E-52
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following is a comparison of the carrying amounts and fair values of
financial instruments as of December 31, 1996:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.................................. $ 20,142,839 $ 20,142,839
Federal funds sold and securities purchased under resale
agreements............................................... 8,400,000 8,400,000
Time certificates of deposit............................... 495,000 495,000
Investment securities...................................... 24,852,369 24,882,627
Loans, net................................................. 141,250,271 141,198,267
Financial liabilities:
Noninterest bearing deposits............................... $ 92,988,957 $ 92,988,957
Interest bearing deposits.................................. 90,442,543 90,449,761
</TABLE>
E-53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
E-54
<PAGE>
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table provides certain information as of December 31, 1996,
concerning the directors of the Company:
<TABLE>
<CAPTION>
SERVED AS PRESENT PRINCIPAL OCCUPATION DURING DIRECTOR
NAME(1) AGE THE PAST FIVE YEARS SINCE
- ----------------------------------- --- ----------------------------------------- -----------
<S> <C> <C> <C>
James H. Gray...................... 59 Chairman of the Board and Chief Executive 1982
Officer of Harbor Bank, President and
Director of Harbor Bancorp
John W. Hancock.................... 59 President, Bancap Investment Group 1992
Dallas E. Haun..................... 43 President and Chief Operating Officer of 1993
Harbor Bank and Director of Harbor
Bancorp
Kermit Q. Jones.................... 77 Owner, Treasure Valley Land & 1982
Cattle/Dairy Farmer
Robert E. Leslie................... 71 Retired Fire Chief 1988
Dorothy K. Matteson................ 70 Uniform Sales, Retired 1982
H. E. Nance........................ 64 Retired President Nance Travel Services 1988
Malcolm C. Todd, M.D............... 83 Physician/Surgeon, Retired 1982
James Willingham................... 68 President, Boulevard Buick and Chairman 1982
of the Board of Harbor Bancorp
Margaret E. Wilson................. 68 Co-Trustee, Wilson Family Trust 1993
</TABLE>
- ------------------------
(1) All the current directors were appointed to the Board of Directors by the
Company's incorporator on June 24, 1982, with the exception of Robert E.
Leslie and H. E. Nance who were appointed March 22, 1988, John W. Hancock
who was appointed on June 23, 1992, Margaret E. Wilson who was appointed on
March 23, 1993, and Dallas E. Haun who was appointed on December 21, 1993.
EXECUTIVE OFFICERS
As of December 31, 1996, the principal Executive Officers of the Company
were:
<TABLE>
<CAPTION>
NAME AND OFFICE AGE DATE ELECTED
- ------------------------------------------------------------------- --- -------------------
<S> <C> <C>
James H. Gray ..................................................... 59 March 22, 1983
President & Chief Executive Officer
Dallas E. Haun .................................................... 43 October 24, 1995
President & Chief Operating Officer
H. Melissa Lanfre ................................................. 45 June 23, 1987
Vice President & Chief Financial Officer
</TABLE>
E-55
<PAGE>
All executive officers of the Company are elected by, and serve at the
pleasure of, the Board of Directors. Set forth above are the names and offices
held by the executive officers of the Company, their respective ages, and the
date when each was elected to his/her present position with the Company. A brief
account of the business experience of each is set forth below:
Mr. Gray has been President of Harbor Bank, the major subsidiary of the
Company, from July of 1976 to January 1983 and Chairman of Harbor Bank from July
of 1976 to present. He currently holds the position of Chairman of the Board and
Chief Executive Officer of Harbor Bank and President of Harbor Bancorp.
Mr. Haun has been with the Company since June 1, 1977 where he served in a
variety of capacities with his most recent assignment being Executive Vice
President/Branch Administrator. He currently holds the position of President and
Chief Operating Officer of Harbor Bank and continues to serve as a voting member
of Harbor Bank's Board of Directors.
Ms. Lanfre' joined the Company on July 13, 1987 and currently holds the
position of Vice President and Chief Financial Officer. Prior to joining the
Company, she served as Controller and Chief Financial Officer of Sterling Bank
from January 1984 until July 1987. Prior to January 1984, Ms. Lanfre' served as
Accounting Manager for Foothill Capital Corporation, a commercial finance
company.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and other officer of the Company (determined as of the
end of the last fiscal year) whose annual salary and bonus exceeded $100,000 in
1996 (the "Named Executives") for each of the fiscal years ended December 31,
1995, 1994, and 1993.
SUMMARY OF CASH AND CERTAIN COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
PAYOUTS
LONG TERM COMPENSATION
--------------------------------------------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------- --------------------------
(E) (F)
- ----------------------------- ------------- ------------- (H)
(C) (D) OTHER RESTRICTED (G) -----------
(A) (B) ---------- --------- ANNUAL STOCK ------------- LTIP
- ----------------------------- --------- SALARY BONUS COMPEN- SATION AWARD(S) OPTIONS/ PAYOUTS
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) ($) SARS(#) ($)
- ----------------------------- --------- ---------- --------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
James H. Gray................ 1996 $ 150,900 $ 60,000 -0- -0- -0- -0-
Chairman of the Board 1995 148,258 60,000 -0- -0- -0- -0-
and Chief Executive 1994 125,400 45,000 -0- -0- -0- -0-
Officer of Harbor
Bank
Dallas E. Haun............... 1996 $ 123,442 $ 60,000 -0- -0- -0- -0-
President and Chief 1995 106,250 50,000 -0- -0- -0- -0-
Operating Officer 1994 97,850 40,000 -0- -0- -0- -0-
of Harbor Bank(4)
Phillip J. Bond(5)........... 1996 $ 89,667 $ 25,000 -0- -0- -0- -0-
<CAPTION>
PAYOUTS
(I)
- ----------------------------- -----------
ALL OTHER
(A) COMPEN-
- ----------------------------- SATION
NAME AND PRINCIPAL POSITION ($)(3)
- ----------------------------- -----------
<S> <C>
James H. Gray................ $ 8,688
Chairman of the Board
and Chief Executive
Officer of Harbor
Bank
Dallas E. Haun............... $ 8,880
President and Chief
Operating Officer
of Harbor Bank(4)
Phillip J. Bond(5)........... $ 619
</TABLE>
- ------------------------
(1) Included in this column are salaries paid for services rendered to the
Company's subsidiary, Harbor Bank, during 1995 before any salary reduction
for contributions to the Company's plan under section
E-56
<PAGE>
401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), and
salary reductions for contributions for welfare plan coverages under section
125 of the Code.
(2) The bonus amounts are payable pursuant to the Company's senior management
compensation plan as approved annually by the Board of Directors. This
column includes bonuses accrued in the current year to be paid in subsequent
year.
(3) "All Other Compensation" is only required to be reported for 1996. The
amount represents the Company's matching contribution for the 401(k) plan
and directors fees.
(4) Dallas E. Haun was promoted to the position of Vice President of Harbor
Bancorp on May 23, 1995, and was elected as the President and Chief
Operating Officer of Harbor Bank on October 24, 1995. On August 22, 1995,
the Board of Directors of Harbor Bank approved an Employment Agreement
effective September 1, 1995, between Harbor Bank and Dallas Haun that would
run to February 22, 1999. The agreement calls for base salary levels and
bonus plan participation declared annually by the Board of Directors and is
extended for an additional year each succeeding February 28 by mutual
agreement.
(5) Phillip J. Bond joined Harbor Bank on September 11, 1995 as Executive Vice
President and Chief Credit Officer and by a Letter Agreement with the Board
of Directors will be entitled to extra compensation in the amount of
$50,000.00 if there is a change in majority ownership of the Bank within 24
months of his employment.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(C) (D)
-------------- -------------------
NUMBER OF VALUE
UNEXERCISED UNEXERCISED IN-
OPTIONS/SARS THE-MONEY
(A) (B) AT OPTIONS/SARS AT
----------------------- --------------------- YEAR-END (#) YEAR-END ($)
SHARES ACQUIRED ON VALUE REALIZED(1) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------------------- --------------------- -------------- -------------------
<S> <C> <C> <C> <C>
James H. Gray............................. -0- -0- -0-/15,788 -0-
Dallas E. Haun............................ -0- -0- -0-/27,365 -0-
</TABLE>
- ------------------------
(1) There are no in-the-money options.
Directors of the Company which are considered to be inside directors, or
employees of the Company, receive a director's fee of $600 per meeting and all
other directors, which are considered to be outside directors, receive a
director's fee of $1,000 per meeting. Non-officer directors serving on the
Company's weekly Loan Committee receive $150 per meeting.
HARBOR BANCORP 1990 STOCK OPTION PLAN
On 2/22/90, the Company adopted an Employee Stock Option Plan for the
purpose of providing an additional means of attracting and retaining competent
managerial personnel. The plan provides 90,000 unissued shares of the Company,
or approximately 10% of the issued and outstanding shares of the Company to be
reserved for issuance to directors, officers and employees of the Company and
its subsidiaries. Options granted pursuant to the plan may be non-qualified
options or incentive options within the meaning of Section 422A of the Internal
Revenue Code.
The plan will be administered by the Board of Directors of the Company or by
a committee appointed from time to time by the Board. The committee or the Board
of Directors will determine with respect to the persons who shall participate in
the plan and the extent of their participation. The purchase price of
E-57
<PAGE>
stock subject to each option shall be not less than one hundred percent of the
fair market value of such stock at the time such option is granted. An employee
owning more than ten percent of the total combined voting power of all classes
of stock of the Bank may not be granted an option under the plan. The purchase
price of any shares exercised shall be paid in full in cash. Options may be
granted pursuant to the plan for a term of up to ten years. Each option shall be
exercisable according to the determination of the Board or committee.
Options granted under the plan shall not be transferable by the optionee
during the optionee's lifetime. In the event of termination of employment as a
result of the optionee's disability or in the event of an employee's death
during the exercise period, to the extent the option is exercisable on the date
employment terminates or the date the employee dies, the option shall remain
exercisable for up to one year (but not beyond the end of the original option
term) by the disabled optionee, or in the event of death of the optionee, a
non-qualified option shall be exercisable by the person or persons to whom
rights under the option shall have passed by will or the laws of descent and
distribution.
If an optionee's employment is terminated, unless termination was by reason
of disability or death the optionee shall have the right, for a three-month
period after termination, to exercise that portion of the option which was
exercisable immediately prior to such termination. In no event may the option be
exercised after the end of the original option term.
In the event of certain changes in the outstanding Common Stock of the
Company without receipt of consideration by the Company, such as stock
dividends, stock splits, recapitalization, reclassification, reorganization,
merger, stock consolidation, or otherwise, appropriate and proportionate
adjustments shall be made in the number, kind and exercise price of shares
covered by any unexercised or partially unexercised options which were already
granted. Optionees will receive prior notice of any pending dissolution or
liquidation of the Company, or reorganization, merger or dissolution or
liquidation of the Company where the Company is not the surviving corporation or
sale of substantially all the assets of the Company, or other form of corporate
reorganization in which the Company is not a surviving entity, or the
acquisition of stock representing more that 50% of the voting power of the stock
of the Company then outstanding ("Terminating Event"). Optionees shall be
notified of the Terminating Event, any option not exercised shall terminate, and
upon the happening of the Terminating Event, the plan shall terminate, unless
some other provision is made in connection with the Terminating Event.
The Board reserves the right to suspend, amend, or terminate the plan, and,
with the consent of the optionee, make such modifications, of the terms and
conditions of his or her option as it deems advisable, except that the Board may
not, without further approval of a majority of the shares, increase the maximum
number of shares covered by the plan, change the minimum option price, increase
the maximum term of options under the plan or permit options to be granted to
any one other than an officer, employee or director of the Company or its
subsidiaries.
HARBOR BANK EMPLOYEE STOCK OWNERSHIP PLAN
On January 1, 1980, Harbor Bancorp established the Harbor Bancorp Employee
Stock Ownership Plan for the purpose of enabling employees of Harbor Bancorp to
invest in employer stock. The plan covers substantially all employees. The Bank
contributes amounts as determined annually by the Company's Board of Directors,
but not in excess of the amount allowable as a deduction for federal income tax
purposes. The contribution may be in cash, common stock or other property which
is acceptable to the Trustee, and shall be invested primarily in common stock,
but may be invested in assets other than common stock. Contributions were
$90,000 in 1996, 1995 and 1994. In absence of an active Employee Stock Ownership
Plan Committee, the trustee of the Plan has full authority as to the investment
of the Plan's assets.
Each employee of the Bank over 21 years of age becomes a participant of the
Plan when he completes one year of service. A new vesting schedule was adopted
which was effective January 1, 1989. Participants
E-58
<PAGE>
vest at the rate of ten percent per year of service until the fifth year of
service when vesting is at 60% in the fifth year, 80% in the sixth year and
fully (100%) vested after 7 years of service. A year of service is a time period
of no more than twelve months in which an employee has a least 1,000 hours of
service commencing on the anniversary date of employment.
A separate account is maintained for each participant which is adjusted
annually for Bank contributions, income, gains and losses of the Plan and
reallocation of forfeitures.
Upon the earliest of retirement at age 65, death or disability, the balance
of the separate account is paid to the participant or his beneficiary in company
common stock or in cash or a combination of common stock and cash (by his
election). If termination of employment occurs before retirement, death or
disability, the vested balance in the separate account is distributed to the
participant in the same manner if the vested balance exceeds $3,500.00. If the
vested balance does not exceed $3,500.00, the participant's election as to the
form of distribution is not required.
For the purpose of allocating Bank contributions and forfeitures, each
participant is credited on a pro rata basis determined by the proportion that
each eligible participant's compensation for the year bears to the total
compensation of all participants. Annual additions to a participant account are
limited to twenty-five percent (25%) of the participant's compensation, or
$30,000, whichever is less. Participants are included in the allocation of
forfeitures after one year.
The annual allocation of the income, gains and losses of the Plan is on a
pro rata basis determined by the proportion that each participant's dollar value
of interest in the Plan bears to the total dollar value interest of all
participants at the beginning of the year.
While the Company has not expressed any intent to terminate the Plan, it has
the right to do so at any time. In the event of termination, each participant's
interest automatically becomes fully vested to the extent of the balance in his
separate account.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information about those stockholders
who are known to the Company to be beneficial owners of more than 5% of the
Common Stock as of December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME & ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- -------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
James H. Gray ................................................ 120,441 8.51%
11 Golden Shore, Suite 600
Long Beach, CA 90802
Harbor Bank Employee Stock Ownership Plan .................... 120,649 8.53%
11 Golden Shore, Suite 600
Long Beach, CA 90802
James A. Willingham .......................................... 81,524 5.76%
1881 Long Beach Boulevard
Long Beach, CA 90806
</TABLE>
The following table sets forth, as of December 31, 1996, the number and
percentage of shares of the Company's Common Stock, the only class outstanding
equity securities of the Company, beneficially
E-59
<PAGE>
owned by each of the Company's directors, and the directors and current
executive officers of the Company, as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME BENEFICIAL OWNERSHIP CLASS
- -------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
James H. Gray................................................. 120,441 8.51%
John W. Hancock............................................... 4,377 .31%
Dallas E. Haun................................................ 44,626 3.15%
Kermit Q. Jones............................................... 55,590 3.93%
Robert E. Leslie.............................................. 837 .06%
Dorothy K. Matteson........................................... 38,741 2.74%
H. E. Nance................................................... 10,828 .77%
Malcolm C. Todd............................................... 48,145 3.40%
James A. Willingham........................................... 81,524 5.76%
Margaret E. Wilson............................................ 51,804 3.66%
All executive officers as a group............................. 456,913 32.29%
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors, officers and principal shareholders of the Company
and their associates were customers of, and had banking transactions with, the
Company's subsidiary, Harbor Bank, in the ordinary course of the Bank's business
during 1993 and the Bank expects to have such transactions in the future. All
loans and commitments to loan included in such transactions were made in
compliance with the applicable laws on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons of similar creditworthiness, and in the opinion
of the Bank, did not involve more than a normal risk of collectibility or
present other unfavorable features.
E-60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial statements and financial statement schedules and exhibits:
(1) and (2) Financial statements and financial statement schedules: See
"Item 8. Financial Statements and Supplementary Data."
(3) Exhibits:
27--FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-k:
None
E-61
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C> <C>
HARBOR BANCORP
By:
DATED: March 26, 1997
<CAPTION>
/s/ JAMES H. GRAY
DATED: March 26, 1997 ----------------------------------------------------
James H. Gray, President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR
By:
DATED: March 26, 1997
By:
DATED: March 26, 1997
<CAPTION>
/s/ JAMES H. GRAY
DATED: March 26, 1997 ----------------------------------------------------
James H. Gray, President and Chief Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
/s/ H. MELISSA LANFRE
----------------------------------------------------
DATED: March 26, 1997 H. Melissa Lanfre
Vice President and Chief Financial Officer
</TABLE>
<TABLE>
<S> <C> <C>
DIRECTORS:
By: /s/ JAMES H. GRAY
DATED: March 26, 1997 ----------------------------------------------------
James H. Gray, Director
By: /s/ JOHN W. HANCOCK
DATED: March 26, 1997 ----------------------------------------------------
John W. Hancock, Director
By: /s/ DALLAS E. HAUN
DATED: March 26, 1997 ----------------------------------------------------
Dallas E. Haun, Director
By: /s/ KERMIT Q. JONES
DATED: March 26, 1997 ----------------------------------------------------
Kermit Q. Jones, Director
</TABLE>
E-62
<PAGE>
<TABLE>
<S> <C> <C>
By: /s/ ROBERT E. LESLIE
DATED: March 26, 1997 ----------------------------------------------------
Robert E. Leslie, Director
By: /s/ DOROTHY K. MATTESON
DATED: March 26, 1997 ----------------------------------------------------
Dorothy K. Matteson, Director
By: /s/ H. E. NANCE
DATED: March 26, 1997 ----------------------------------------------------
H. E. Nance, Director
By: /s/ MALCOLM C. TODD
DATED: March 26, 1997 ----------------------------------------------------
Malcolm C. Todd, Director
By: /s/ JAMES A. WILLINGHAM
DATED: March 26, 1997 ----------------------------------------------------
James A. Willingham, Director
By: /s/ MARGARET E. WILSON
DATED: March 26, 1997 ----------------------------------------------------
Margaret E. Wilson, Director
</TABLE>
E-63
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX F
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1997
/ / TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITIONS PERIOD FROM TO
Commission file number 2-79912
------------------------
HARBOR BANCORP
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3764395
(I.R.S. Employer
(State or other jurisdiction of Identification
incorporation or organization) No.)
11 GOLDEN SHORE, LONG BEACH, CA 90802
(Address of principal executive
offices)
</TABLE>
(Issuer's telephone number)
(562) 491-1111
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
after the distribution of securities under a plan confirmed by a court.
Yes / / No / / Other N/A
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common stock, no par
value--1,415,214 shares as of June 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-1
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 1997 and December
31, 1996
Condensed consolidated statements of income--three months ended June
30, 1997 and 1996; and six months ended June 30, 1997 and 1996
Condensed consolidated statements of cash flows six months ended
June 30, 1997 and 1996
Notes to condensed consolidated financial statements--June 30, 1997
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Service Securities
ITEM 4. Submission of Matter to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
PART III. SIGNATURES
F-2
<PAGE>
ITEM I: FINANCIAL INFORMATION
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
JUNE 30,
1997
-----------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
ASSETS
Cash and due from banks............................................................... $ 20,083 $ 20,143
Federal funds sold and securities purchased under resale agreements................... 30,500 8,400
----------- ------------
Cash and cash equivalents........................................................... 50,583 28,543
Time certificates of deposit.......................................................... 495 495
Investment securities:
Held to maturity(market value of $5,466,784 in 1997 and $6,094,994 in 1996)........... 5,428 6,065
Available for sale.................................................................... 5,791 18,788
Loans................................................................................. 148,671 143,988
Less allowance for loan losses...................................................... 2,829 2,738
----------- ------------
Net loans......................................................................... 145,842 141,250
Bank premises and equipment:
Land................................................................................ 159 159
Buildings and improvements.......................................................... 4,271 4,249
Furniture, fixtures and equipment................................................... 3,664 3,572
----------- ------------
8,094 7,980
Less accumulated depreciation and amortization...................................... 6,311 6,132
----------- ------------
1,783 1,848
Other real estate..................................................................... 549 329
Accrued interest receivable........................................................... 864 856
Other assets.......................................................................... 1,518 1,929
----------- ------------
Total assets...................................................................... $ 212,853 $ 200,103
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest bearing.................................................................... $ 104,818 $ 90,442
Noninterest bearing................................................................. 90,585 92,989
----------- ------------
Total deposits.................................................................... 195,403 183,431
Accrued expenses and other liabilities................................................ 1,151 972
----------- ------------
Total liabilities................................................................. 196,554 184,403
Stockholders' equity:
Common stock, no par value; 5,000,000 shares authorized; issued and outstanding,
1,415,214 shares in 1997 and 1996................................................. 13,963 13,963
Retained earnings................................................................... 2,471 1,871
Unrealized losses on securities available for sale, net of tax...................... (135) (134)
----------- ------------
Total stockholders' equity........................................................ 16,299 15,700
----------- ------------
Total liabilities and stockholders' equity........................................ $ 212,853 $ 200,103
----------- ------------
----------- ------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-3
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans............................. $ 6,901 $ 6,099 $ 3,545 $ 3,074
Interest on U.S. government and agency obligations..... 315 758 154 354
Interest on obligations of states and political
subdivisions......................................... 11 7 5 4
Interest on other investments.......................... 40 41 20 20
Interest on federal funds sold and securities purchased
under agreements to resale........................... 502 387 296 242
------------ ------------ ------------ ------------
Total interest income................................ 7,769 7,292 4,020 3,694
Interest expense:
Interest on deposits................................... 1,588 1,409 833 753
Interest on borrowed funds............................. -- 4 -- --
------------ ------------ ------------ ------------
Total interest expense............................... 1,588 1,413 833 753
Net interest income...................................... 6,181 5,879 3,187 2,941
Provision for loan losses................................ 435 444 285 248
Net interest income after provision for loan losses...... 5,746 5,435 2,902 2,693
Other operating income:
Service charges on deposit accounts.................... 466 486 245 226
Loan servicing fees and other fees and charges......... 99 112 48 78
------------ ------------ ------------ ------------
Total other operating income......................... 565 598 293 304
Noninterest expense:
Salaries, wages and employee benefits.................. 1,912 1,852 925 961
Occupancy expenses..................................... 1,069 1,100 531 559
Equipment expenses..................................... 160 207 78 101
Data processing expenses............................... 266 300 133 147
Other operating expenses............................... 1,660 1,834 876 841
------------ ------------ ------------ ------------
Total noninterest expense............................ 5,067 5,293 2,543 2,609
------------ ------------ ------------ ------------
Income before taxes based on income...................... 1,244 740 652 388
Provision for taxes based on income...................... 467 279 251 154
------------ ------------ ------------ ------------
Net income............................................... $ 777 $ 461 $ 401 $ 234
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares and common share
equivalents............................................ 1,448,725 1,448,725 1,448,725 1,448,725
Earnings per share....................................... $ 0.54 $ 0.32 $ 0.28 $ 0.16
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-4
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
------------ ------------
(000'S OMITTED)
<S> <C> <C>
Operating activities:
Net income......................................................................... $ 777 $ 461
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization...................................... 219 244
Provision for loan losses........................................................ 435 444
Increase in interest receivable.................................................. (8) (157)
Increase in interest payable..................................................... 23 32
Other............................................................................ 528 438
------------ ------------
Net cash provided by operating activities...................................... $ 1,974 $ 1,462
Investing activities:
Proceeds from maturities, sales and calls of investment securities................. 18,624 16,504
Purchases of investment securities................................................. (4,991) (5,000)
Net increase in loans.............................................................. (5,027) (3,023)
Capital expenditures............................................................... (114) (226)
Other real estate.................................................................. (221) (1,097)
------------ ------------
Net cash provided by investing activities...................................... $ 8,271 $ 7,158
Financing activities:
Net increase in commercial and other demand deposits, savings and money market
deposits and certificates of deposit............................................. $ 11,972 $ 3,400
Cash dividends paid................................................................ (177) --
------------ ------------
Net cash provided by financing activities...................................... $ 11,795 $ 3,400
Increase in cash and cash equivalents............................................ 22,040 12,020
Cash and cash equivalents at beginning of period..................................... 28,543 26,164
------------ ------------
Cash and cash equivalents at end of period........................................... $ 50,583 $ 38,184
------------ ------------
------------ ------------
</TABLE>
See notes to unaudited consolidated financial statements.
F-5
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
Certain reclassifications have been made in the 1996 financial statements to
conform to the presentations used in 1997.
The balance sheet on December 31, 1996 has been derived from the audited
financial statements at that date. The accompanying notes are an integral part
of these financial statements.
PRINCIPLES OF CONSOLIDATION
Harbor Bancorp (the "Company") was formed on July 23, 1982. The unaudited
condensed consolidated financial statements include all the accounts of the
Company and its wholly-owned subsidiaries, Harbor Bank and Harbor Bank
Properties. All intercompany accounts and transactions have been eliminated.
Investment securities
The Company adopted Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of January
1, 1994.
Investment securities held to maturity are securities which the Company has
the positive intent and ability to hold until maturity. Accordingly, these
securities are carried at amortized cost. Unrealized holding gains and losses
are not recognized in the financial statements until realized or until a decline
in fair value below cost is deemed to be other than temporary. Investment
securities available for sale include debt securities and mutual funds. These
securities are stated at fair value with unrealized holding gains and losses
reflected as a separate component of stockholders' equity, net of income taxes.
Gains and losses are determined on the specific identification method. Any
decline in the fair value of the investments which is deemed to be other than
temporary is charged against current earnings.
IMPAIRED LOANS
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended, effective January 1, 1995. This statement requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rates or the fair value of the
underlying collateral, and specifies alternative methods for which there are
credit concerns. For purposes of applying this standard, impaired loans have
been defined as all non-accrual loans. The Company's policy for income
recognition was not affected by adoption of the standard. The adoption of SFAS
No. 114 did not have any effect on the total reserve for credit losses or
related provision.
F-6
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's evaluation of the
quality of the loan portfolio. The allowance is maintained at a level considered
to be adequate for potential loan losses based on management's assessment of
various factors affecting the loan portfolio, which includes a review of problem
loans, business conditions and the overall quality of the loan portfolio. The
allowance is increased by the provision for loan losses charged to operations
and reduced by loans charged off to the allowance, net of recoveries. Other Real
Estate
Other real estate ("ORE") is stated at the lower of cost or fair market
value, net of estimated selling costs.
INCOME TAXES
Income tax expense is the current and deferred tax consequence, of events
that have been recognized in the financial statements, as measured by the
provisions of enacted tax law.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the related assets
which range from 10 to 30 years for buildings and improvement and 3 to 10 years
for furniture, fixtures and equipment.
EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted
average number of common stock and common stock equivalents (stock options)
outstanding during each period. The number of shares used in the per share
calculations for the periods ended June 30, 1997 and 1996 was 1,448,725.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact for the second quarter ended June
30, 1997 and June 30, 1996 is $0.01 and $0.01 per share, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Harbor Bancorp's ("Company") performance during the first six months of 1997
shows improvement which is supported by overall improvement in the local and
national economic environment. The purpose of the following discussion is to
focus on the above mentioned performance and other information about the
Company's financial condition and results of operations which is not otherwise
apparent from the consolidated financial statements included in this quarterly
report. Reference should be made to those statements and the condensed financial
data presented herein for an understanding of the following discussion and
analysis.
F-7
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FINANCIAL CONDITION
During the first six months of 1997, the Company experienced a net increase
in liquid assets. Cash and cash equivalents increased $22,040,000, or 77.22%,
from $28,543,000 at December 31, 1996 to $50,583,000 at June 30, 1997.
Investment securities declined $13,634,000, or 54.86%, from $24,853,000 at
December 31, 1996 to $11,219,000 at June 30, 1997. This net increase in liquid
assets is primarily a result of maintaining liquidity in the form of short term
and overnight investments in anticipation of growth in loan volume in the
remainder of 1997. During the second quarter of 1997, loan volume increased with
loans at $148,671,000 at June 30, 1997 compared to loans at $143,988,000 at
December 31, 1996. Loans increased $4,683,000, or 3.25%, as a result of the
Company's decision to maintain a conservative posture with respect to lending in
view of the current economic condition. Total assets of the Company increased
from $200,103,000 at December 31, 1996 to $212,853,000 at June 30, 1997. This
increase of $12,750,000, or 6.37%, in total assets occurred primarily in cash
and cash equivalents.
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". As of June 30, 1997, the bank had $5,428,000 in
securities classified as held to maturity and $5,791,000 in securities
classified as available for sale.
Substantially all of the Company's deposits are local, core deposits. The
Company does not have any out-of-area brokered deposits included in the deposit
base. Total deposits increased $11,972,000, or 6.52%, for the first six months
of 1997. This is a result of an increase in interest bearing deposits which
increased $14,376,000, or 15.9%, from $90,442,000 at December 31, 1996 to
$104,818,000 at June 30, 1997. This increase in interest bearing deposits is
primarily the result of an increase of approximately $8,900,000 in short-term
certificate of deposit for a single customer relationship. In addition, there
was a decrease of noninterest bearing deposits of $2,404,000, or 2.59%, from
$92,989,000 at December 31, 1996 to $90,585,000 at June 30, 1997.
As a result of the Federal Deposit Insurance Corporation ("the FDIC")
examination at December 31, 1993, the Bank and the Federal Deposit Insurance
Corporation executed a Memorandum of Understanding ("FDIC Memorandum") dated
August 3, 1994.
As a result of an examination conducted by the FDIC as of January 8, 1996,
the FDIC determined the Bank was in compliance with the terms of the FDIC
Memorandum, and the FDIC removed the FDIC Memorandum on May 22, 1996. On January
3, 1995, the Bank and the Superintendent executed a Memorandum of Understanding
("Superintendent's Memorandum) as a result of an examination at December 31,
1993.
As a result of a request made by the Board of Directors of Harbor Bank on
May 28, 1996, the Superintendent determined that the Bank was in compliance with
the terms of the Superintendent's Memorandum, and the Superintendent removed the
Superintendent's Memorandum on June 12, 1996.
As a result of an examination conducted by the Federal Reserve Bank of San
Francisco ("FRB") as of March 31, 1994, the Company and the FRB executed a
memorandum of Understanding (the "FRB Memorandum") dated October 25, 1994. Based
on the Company's overall improved financial condition
F-8
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and the adoption of certain resolutions by the Company's Board of Directors, the
FRB terminated the FRB Memorandum effective December 3, 1996.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers who may need assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Historically, the overall liquidity of the Company has been enhanced by a
significant aggregate amount of core deposits. As described in the analysis of
financial condition, the Bank has not relied on large-denomination time
deposits.
To meet short-term liquidity needs, the Bank has maintained adequate
balances in federal funds sold, certificates of deposits with other financial
institutions and investment securities having maturities of five years or less.
Liquid assets (cash, federal funds sold and securities purchased under
agreements to resale, deposits in other financial institutions and investment
securities) as a percent of total deposits, are 31.88% and 29.38% as of June 30,
1997 and December 31, 1996, respectively.
The Bank's goal is to maintain federal funds sold at $7 to $10 million
dollars on an average with minimum daily investments monitored closely. However,
as part of management's liquidity plan for the second quarter of 1997, federal
funds sold was maintained at higher than normal levels in anticipation of loan
funding and to maximize yield on short-term investments due to the shape of the
current yield curve. Deposits with other institutions and securities purchased
under agreements to resale will be maintained as alternative short-term
investment products.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Harbor Bank intends to maintain
interest-earning assets, comprised primarily of both loans and investments, and
interest-bearing liabilities, comprised primarily of deposits, maturing or
repricing evenly in order to eliminate any impact from interest rate changes. In
this way, both assets and liabilities can be substantially repriced
simultaneously with interest rate changes.
The impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because its assets and
liabilities consist primarily of monetary items. The relatively low proportion
of the Company's fixed assets to total assets reduces both the potential of
inflated earnings resulting from understated depreciation charges and the
potential of significant understatement of absolute asset values. However,
inflation does have a considerable indirect impact on banks, including increased
loan demand, as it becomes necessary for producers and consumers to acquire
additional funds to maintain the same levels of production, consumption and new
investments. Inflation also frequently results in high interest rates which can
affect both yields on earning assets and rates paid on deposits and other
interest-bearing liabilities. The Company monitors inflation rates to insure
that ongoing programs are compatible with fluctuations in inflation and
resultant changes in interest rates.
F-9
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESULTS OF OPERATIONS
The Company reported net income of $777,000, or $0.54 per share, for the six
months ended June 30, 1997, compared to net income of $461,000, or $0.32 per
share, for the same period in 1996.
Net interest income is an effective measurement of how well Management has
balanced the Company's interest rate sensitive assets and liabilities as well as
optimizing the allocation of resources.
Net interest income of $6,181,000 for the six months ended June 30, 1997,
reflects an increase of $302,000 or 5.14%, from $5,879,000 for the same period
of 1996. Rising interest rates and net earning assets, which increased from
$177,736,000 at December 31, 1996 to $190,885,000 at June 30, 1997, are the
primary reason for the improvement in net interest income.
The Company recorded $435,000 in provision for loan losses during the first
six months of 1997 compared to $444,000 for the six months ended June 30, 1996.
The decrease in the provision for possible loan losses, despite an increase in
loan volume, is a result of the overall improvement of the quality of the loan
portfolio and anticipated decline in other real estate.
During the first six months of 1997, the Company maintained a strict focus
on controlling noninterest expense. The focus on noninterest expense control
began with a corporate commitment in 1989 and, today, continues to be emphasized
and enforced. As a result of this continued effort, total noninterest expense
categories of salaries, wages and employee benefits, occupancy expense,
equipment expense, data processing expense and other operating expense,
decreased $226,000 or 4.30%, during the six months ended June 30, 1997 over the
same period in 1996.
RISK ELEMENTS
The policy of Harbor Bank is that all loans that are past due for ninety
(90) days must be placed on non-accrual status. At June 30, 1997, loans on
non-accrual status were $3,210,000, or 2.16% of total loans, compared to
$3,783,000, or 2.63%, at December 31, 1996. Accruing loans which are
contractually past due ninety (90) days or more were $29,000 at June 30, 1997
compared to $170,000 at December 31, 1996.
At June 30, 1997, the Company was not aware of information regarding
performing loans which would cause them to have serious doubts as to the ability
of the borrowers to comply with loan repayment terms, nor are they aware of any
trends which might have a material impact on future operating results.
CAPITAL RESOURCES
Management seeks to maintain a level of capital adequate to support
anticipated asset growth and credit risks and to ensure that the Company is
within established regulatory guidelines and industry standards. In 1996,
stockholders' equity increased $1,143,192 due to retention of the Company's 1996
net income. The Company's capital plan for 1997 contemplates continued growth in
stockholders' equity through the retention of net income. Minimum capital ratios
required under the final 1994 risk-based capital regulations are 6.0% for Tier 1
Capital and 8.0% for Total Capital. At December 31, 1996 the Company had Tier 1
Capital of 10.33% and Total Capital of 11.58% and at June 30, 1997 the company
had Tier 1 Capital of 10.62% and Total Capital of 11.87%.
F-10
<PAGE>
HARBOR BANCORP AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as noted below, due to the nature of their business, the Company, the
Bank, and their subsidiaries are subject to legal actions threatened or filed
which arise from the normal course of their business. Management believes that
such litigation is incidental to the business of the Company and the Bank and
the eventual outcome of all currently pending legal proceedings against the Bank
will not be material to the Company's or the Bank's financial position or
results of operations.
The Bank has been named in a litigation matter between the State of
California Department of Insurance and a certified public accounting firm
concerning the public accounting firm's audit of a failed insurance company. At
December 31, 1996, the Bank believed it had meritorious defenses, that it was
covered by comprehensive general liability insurance and had accrued no
liability for the matter. During the first quarter of 1997, the Bank was
notified by its insurance carrier that it has presently declined insurance for
this matter. No estimate can be made of the range of loss that is reasonably
possible and no accrual has been made as of the date of this filing.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SERVICE SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27--Financial Data Schedule
F-11
<PAGE>
PART III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereto duly authorized.
<TABLE>
<S> <C>
HARBOR BANCORP
/s/ DALLAS E. HAUN
---------------------------------------------
Dated: August 12, 1997 Dallas E. Haun
Vice President
/s/ MELISSA LANFRE
---------------------------------------------
Dated: August 12, 1997 Melissa Lanfre
Vice President & CFO
</TABLE>
F-12
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware Code authorizes City National to indemnify
directors and officers in certain circumstances against liabilities, including
expenses, incurred while acting in such capacities; provided, generally, that
any such indemnified director or officer acted in good faith and in a manner he
or she reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The City National By-laws provide for the
indemnification of directors and officers to the maximum extent permitted by the
Delaware Code.
In addition, the City National Certificate provides that City National shall
eliminate the personal liability of its directors to the fullest extent
permitted by the Delaware Code, and City National has entered into
indemnification agreements with certain of its directors providing for
additional indemnification. City National has policies of directors' and
officers' liability insurance which insure directors and officers against the
cost of defense, settlement, or payment of a judgment under certain
circumstances.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this
Registration Statement or are incorporated herein by reference.
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
4.1 Certificate of Incorporation (incorporated by reference to City National's
Registration Statement on Form S-4 (333-16197) filed on November 15,
1996).
4.2 Bylaws (incorporated by reference to City National's Annual Report on Form
10-K for the year ended December 31, 1994).
5* Opinion of Richard H. Sheehan, Jr., Senior Vice President and General
Counsel of Registrant
8* Tax Opinion of Munger, Tolles & Olson LLP
23.1 Consent of KPMG Peat Marwick LLP
23.2* Consent of Mr. Sheehan (included within Exhibit 5)
23.3 Consent of Ernst & Young LLP
23.4* Consent of Munger, Tolles & Olson LLP (included within Exhibit 8)
24* Power of Attorney
99.1 Form of Letter of Transmittal and Instructions
99.2 Form of Proxy
</TABLE>
- ------------------------
* Previously filed.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(B) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the
II-1
<PAGE>
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of any employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first-class mail or equally
prompt means. This includes information contained in documents filed subsequent
to the effective date of the registration statement through the date responding
to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Beverly Hills, state of
California on October 14, 1997.
CITY NATIONAL CORPORATION
By: /s/ RICHARD H. SHEEHAN, JR.
------------------------------------
Richard H. Sheehan, Jr.
SENIOR VICE PRESIDENT,
SECRETARY AND GENERAL COUNSEL
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
* Vice Chairman of the
- ------------------------------ Board, Chief Executive October 14, 1997
Russell Goldsmith Officer and Director
Executive Vice President
* and Treasurer/Chief
- ------------------------------ Financial Officer October 14, 1997
Frank P. Pekny (Principal Financial
Officer)
*
- ------------------------------ Controller (Principal October 14, 1997
Heng W. Chen Accounting Officer)
*
- ------------------------------ Chairman of the Board October 14, 1997
Bram Goldsmith
*
- ------------------------------ President and Director October 14, 1997
George H. Benter, Jr.
*
- ------------------------------ Director October 14, 1997
Mirion P. Bowers, M.D.
*
- ------------------------------ Director October 14, 1997
Richard L. Bloch
*
- ------------------------------ Director October 14, 1997
Stuart D. Buchalter
*
- ------------------------------ Director October 14, 1997
Burton S. Horwitch
*
- ------------------------------ Director October 14, 1997
Barry M. Meyer
*
- ------------------------------ Director October 14, 1997
Charles E. Rickershauser, Jr.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director October 14, 1997
Edward Sanders
*
- ------------------------------ Director October 14, 1997
Andrea L. Van De Kamp
*
- ------------------------------ Director October 14, 1997
Kenneth Ziffren
</TABLE>
*By: /s/ RICHARD H. SHEEHAN,
JR.
-------------------------
Richard H. Sheehan, Jr.
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
City National Corporation
We consent to the incorporation by reference in this Registration
Statement on Form S-4 of City National Corporation of our report, dated
January 24, 1997, on the consolidated financial statements of City National
Corporation and its subsidiaries as of December 31, 1996 and 1995 and for
each of the years in the three-year period ended December 31, 1996, which
report appears in the December 31, 1996 annual report on Form 10-K of City
National Corporation incorporated herein by reference, and to the reference
to our firm under the heading of "Experts" and "Selected Consolidated
Financial Data" in the Prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
October 13, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the incorporation by reference
therein of our report dated January 31, 1997, with respect to the
consolidated financial statements of Harbor Bancorp included in its Annual
Report (Form 10-KSB) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission, included in the Proxy Statement of Harbor
Bancorp that is made a part of the Registration Statement (Amendment No. 1 to
Form S-4 No. 333-37045) and Prospectus of City National Corporation, both
dated October 15, 1997.
ERNST & YOUNG LLP
Los Angeles, California
October 14, 1997
<PAGE>
LETTER OF TRANSMITTAL AND FORM OF ELECTION
WITH RESPECT TO SHARES OF COMMON STOCK OF
HARBOR BANCORP
IN CONNECTION WITH THE PROPOSED MERGER OF HARBOR BANCORP
WITH AND INTO
CITY NATIONAL CORPORATION
This Letter of Transmittal and Form of Election ("Letter of Transmittal") is
being delivered to you in connection with the proposed merger (the "Merger") of
Harbor Bancorp ("Harbor") with and into City National Corporation ("City
National"), pursuant to the Agreement and Plan of Merger, dated as of August 28,
1997, by and between City National and Harbor (the "Merger Agreement"). This
Letter of Transmittal must be completed by holders of shares of Common Stock, no
par value, of Harbor (the "Shares" or "Harbor Stock"), who wish to make an
Election (as defined below) as to the form of Merger Consideration (as defined
below) into which such holder's Shares are converted in the Merger. For an
Election to be properly made and effective, this Letter of Transmittal, properly
completed, together with the certificates (the "Certificates") representing
Shares as to which (an) Election(s) is/are being made (or guarantee of delivery
as provided herein) or Shares delivered by book-entry transfer to the Exchange
Agent's account at a Book-Entry Transfer Facility (as defined below) and all
other required documents, must be received by the Exchange Agent prior to
, 1998, unless extended to a later date by the mutual agreement of
the City National and Harbor (the "Election Deadline"). Such Election is subject
to the terms, conditions, and limitations set forth in (a) the Proxy
Statement/Prospectus, dated October 15, 1997, relating to the Merger (the "Proxy
Statement/Prospectus"), (b) the Merger Agreement, attached as Appendix A to the
Proxy Statement/Prospectus, and (c) the accompanying instructions. The tax
consequences to holders will vary depending upon, among other things, the form
of Merger Consideration into which such holders' Shares are converted in the
Merger. Each Harbor shareholder should consult his or her own financial advisor
and tax advisor as to the specific consequences of the Merger and Election to
such shareholder. The instructions to this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
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SHAREHOLDERS SHOULD DELIVER THIS LETTER OF TRANSMITTAL, PROPERLY
COMPLETED, ACCOMPANIED BY ALL REQUIRED DOCUMENTS, NO LATER THAN 5:00 P.M.,
PACIFIC STANDARD TIME, ON , 1998, IN ORDER TO ASSURE ITS
RECEIPT PRIOR TO THE ELECTION DEADLINE.
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THE EXCHANGE AGENT IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
BY MAIL:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
[Address]
BY OVERNIGHT DELIVERY:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
[Address]
BY HAND:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
[Address]
BY FACSIMILE TRANSMISSION:
(for eligible institutions only)
( ) -
CONFIRM BY TELEPHONE:
( ) -
<PAGE>
THIS LETTER OF TRANSMITTAL, COMPLETED, SIGNED AND ACCOMPANIED BY ALL OTHER
REQUIRED DOCUMENTS, SHOULD BE RETURNED TO THE EXCHANGE AGENT IN THE ACCOMPANYING
ENVELOPE. YOU WILL NOT HAVE ANOTHER OPPORTUNITY TO MAKE AN ELECTION OF THE
MERGER CONSIDERATION YOU PREFER TO RECEIVE.
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY. YOU MUST SIGN THIS LETTER OF TRANSMITTAL
WHERE INDICATED BELOW AND COMPLETE THE
SUBSTITUTE FORM W-9 WHICH IS
ATTACHED HERETO.
<TABLE>
<CAPTION>
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DESCRIPTION OF SHARES
(ATTACH SEPARATE SIGNED LIST IF NECESSARY)
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TOTAL NUMBER
OF SHARES WITH
NUMBER OF RESPECT TO
SHARES WHICH
NAME(S) AND ADDRESS(ES) OF REGISTERED CERTIFICATE EVIDENCED BY ELECTIONS ARE
HOLDER(S) NUMBERS* CERTIFICATE(S)* MADE
<S> <C> <C> <C>
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* NEED NOT BE COMPLETED BY SHAREHOLDERS DELIVERING SHARES BY BOOK-ENTRY TRANSFER.
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</TABLE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE MAKING ANY ELECTION.
<TABLE>
<CAPTION>
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TYPE OF ELECTION (See Instructions B1 and B2)
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COMBINATION ELECTION
--------------------------------
TOTAL NUMBER OF SHARES CASH ELECTION STOCK ELECTION CASH STOCK
WITH RESPECT TO WHICH AN (NUMBER OF (NUMBER OF (NUMBER OF (NUMBER OF
ELECTION IS BEING MADE SHARES) SHARES) SHARES) SHARES)
<S> <C> <C> <C> <C>
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</TABLE>
<PAGE>
Pursuant to the Merger Agreement, at least 48% (the "Minimum Stock Amount"),
and no more than 55% (the "Maximum Stock Amount"), of the aggregate number of
issued and outstanding shares of Harbor Stock will be converted into the right
to receive City National Stock (as defined below) and the balance of the
aggregate number of issued and outstanding shares of Harbor Stock will be
converted into the right to receive cash. If holders of Harbor Stock elect, in
the aggregate, to convert more than the Maximum Stock Amount into shares of City
National Stock, then certain holders of Harbor Stock will receive a prorated
number of shares of City National Stock and a prorated amount of cash such that
a number or shares of Harbor Stock approximately equal to the Maximum Stock
Amount is converted into shares of City National Stock. In addition, if holders
of Harbor Stock elect, in the aggregate, to convert less than the Minimum Stock
Amount into shares of City National Stock, then certain holders of Harbor Stock
will receive a prorated number of shares of City National Stock and a prorated
amount of cash such that a number or shares of Harbor Stock at least equal to
the Minimum Stock Amount is converted into shares of City National Stock.
Accordingly, holders of Harbor Stock are unlikely to receive the precise
proportion of City National Stock and/or cash indicated by such holder's
election. None of City National, Harbor, the City National Board of Directors or
the Harbor Board of Directors makes any recommendation as to the type of
consideration the shareholders should elect to receive. Each shareholder must
make his or her own decision with respect to such election. If a shareholder
does not make an election, his or her shares will be treated as undesignated
shares (as defined below).
/ / Check here if shares are being delivered by book-entry transfer to the
Exchange Agent's account on one of the book-entry transfer facilities (each,
a "Book-Entry Transfer Facility") and complete the following:
Check Box of Applicable Book-Entry Transfer Facility:
/ / The Depository Trust Company
/ / Philadelphia Depository Trust Company
/ / Midwest Securities Trust Company
/ / Other (Please Specify ___________________
Account Number ________________ Transaction Code Number _________
Shareholders whose Certificates are not immediately available or who cannot
deliver their Certificates and other required documents to the Exchange Agent
prior to the Election Deadline or who cannot complete the procedure for delivery
by book-entry transfer on a timely basis and who wish to make an Election must
complete this Letter of Transmittal and otherwise comply with the Guarantee of
Delivery procedures, including (i) the completion of the Guarantee of Delivery
at the time this Letter of Transmittal is completed and (ii) delivery of the
underlying Shares on a timely basis. SEE INSTRUCTION A1. Elections with respect
to all Shares subject to a Guarantee of Delivery must be made above at the time
the Guarantee of Delivery is completed. In addition, at the time the
Certificates (or Shares by book-entry transfer) are delivered pursuant to the
Guarantee of Delivery, the guarantor must submit to the Exchange Agent another
Letter of Transmittal with only the section entitled "Notice of Delivery Under
Guarantee" below properly completed (or must otherwise provide such information
to the Exchange Agent) to enable the Exchange Agent to identify the Certificates
or Shares being delivered. No change in a shareholder's Election may be made
pursuant to the Letter of Transmittal delivering Certificates or Shares
previously covered by a Guarantee of Delivery. If the guarantor fails to deliver
the Certificates (or Shares by book-entry transfer) in accordance with the terms
of the Guarantee of Delivery, without limitation of any other recourse, any
purported Election with respect to Shares subject to such guarantee will be
void.
<PAGE>
GUARANTEE OF DELIVERY
(TO BE USED ONLY IF CERTIFICATES ARE NOT SURRENDERED HEREWITH.
SEE INSTRUCTION A1.)
The undersigned, a member firm of a registered national securities
exchange, a member of the National Association of Securities Dealers, Inc., or
a commercial bank or trust company having an office or correspondent in the
United States, hereby guarantees delivery to the Exchange Agent, at one of its
addresses set forth above, of Certificates for the Shares to which this Letter
of Transmittal relates, duly endorsed in blank or otherwise acceptable in form
for transfer on the books of Harbor, no later than 5:00 P.M., Pacific Standard
Time, on the third New York Stock Exchange ("NYSE") trading day after the date
of execution of this Guarantee of Delivery. THIS BOX IS NOT TO BE USED TO
GUARANTEE SIGNATURES. SEE INSTRUCTION A3.
Dated: __________, 19_
<TABLE>
<S> <C> <C>
Number of Shares: --------------------------------- ---------------------------------
(Firm--Please Print)
</TABLE>
Check applicable box if Shares will be --------------------------------------
delivered by book-entry transfer: (Authorized Signature)
<TABLE>
<S> <C> <C>
/ / The Depository Trust Company Address: --------------------------------------
/ / Midwest Securities Trust Company --------------------------------------
/ / Philadelphia Depository Trust --------------------------------------
Company
/ / Other (Please Specify ----------------)
</TABLE>
Tel. No.
Account Number: -------------- (including area code): --------------
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<TABLE>
<S> <C>
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</TABLE>
<PAGE>
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NOTICE OF DELIVERY UNDER GUARANTEE
(TO BE COMPLETED UPON DELIVERY OF SHARES PURSUANT
TO A GUARANTEE OF DELIVERY)
Name(s) of Registered Holder(s):
------------------------------------------------------------
Window Ticket No. (if any):
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Date of Execution of Guarantee
of Delivery:
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Name of Institution which provided
Guarantee of Delivery:
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If Delivered by Book-Entry Transfer (assuming such procedure is available),
Check Box of Applicable Book-Entry Transfer Facility:
/ / The Depository Trust Company
/ / Philadelphia Depository Trust Company
/ / Midwest Securities Trust Company
/ / Other (Please Specify ___________________
<TABLE>
<S> <C>
Account Number -------------- Transaction Code Number --------------
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</TABLE>
<TABLE>
<S> <C>
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</TABLE>
<PAGE>
Ladies and Gentlemen:
In connection with the Merger of Harbor with and into City National, subject
to the election and proration procedures set forth in the Merger Agreement, each
holder of Harbor Stock is entitled, with respect to the Merger Consideration to
be received for each share of Harbor Stock held by such holder, to (i) elect to
receive a fraction of a share of City National Stock equal to the Exchange Ratio
(as defined below) (a "Stock Election"), (ii) elect to receive cash in the
amount of $24.10 (a "Cash Election") or (iii) elect to receive a combination of
shares of City National Stock (at the rate of the Exchange Ratio for a whole
share of Harbor Stock) and cash (at the rate of $24.10 for a whole share of
Harbor Stock) (a "Combination Election"). If a holder does not make an effective
Election, or if this Letter of Transmittal is received after 5:00 p.m., Pacific
Standard Time on , 1998, his or her shares will be deemed
"Undesignated Shares." The "Exchange Ratio" is the quotient of (A) $24.10
divided by (B) the average of the daily closing prices of a share of City
National Stock on the NYSE as reported in the Wall Street Journal for the twenty
consecutive trading days ending on the third trading day immediately prior to
the Effective Time (as defined in the Merger Agreement) (such average, the
"Final City National Stock Price"), provided, however, that if the Final City
National Stock Price is more than $31.9125, the Exchange Ratio will be 0.7582,
if the Final City National Stock Price is less than $23.5875, the Exchange Ratio
will be 1.0217, or if the Final City National Stock Price is greater than
$34.6875, the Exchange Ratio will be $26.20 divided by the Final City National
Stock Price. (The City National Stock and/or cash into which a Share is
converted in the Merger is referred to herein as the "Merger Consideration.")
The undersigned understands that the purpose of the election procedure is to
permit holders of Shares to express their preferences for the type of
consideration they wish to receive in the Merger; provided, however, that a
minimum of 48% and a maximum of 55% of the outstanding Shares will be converted
into the right to receive City National Stock and the balance of the outstanding
Shares will be converted into the right to receive cash.
In the event that the aggregate number of Shares of Harbor Stock as to which
Stock Elections and Combination Elections for Harbor Stock have been effectively
made exceeds the Maximum Stock Amount, then (i) all Undesignated Shares and
shares with respect to which dissenters' rights have been perfected in
accordance with California law ("Dissenting Shares") will be deemed to have made
Cash Elections and (ii) each holder of Harbor Stock who made an effective Stock
Election or Combination Election for City National Stock will be entitled to a
prorated number of shares of City National Stock and a prorated amount of cash
such that a number of Shares approximately equal to the Maximum Stock Amount is
converted into the right to receive shares of City National Stock.
Correspondingly, in the event that the aggregate number of shares of Harbor
Stock as to which Stock Elections and Combination Elections for Harbor Stock
have effectively made is less than the Minimum Stock Amount, then the Exchange
Agent will select by lot such number of holders of Undesignated Shares to
receive City National Stock as will be necessary so that the number of shares
for which a Stock Election and Combination Election for City National Stock has
been made or is deemed to have been made with respect to such Undesignated
Shares will be approximately equal to the Minimum Stock Amount. In the event
that all Undesignated Shares plus all shares as to which Stock Elections and
Combination Elections for Harbor Stock have been made are less than the Minimum
Stock Amount, then each holder of Harbor Stock who made an effective Cash
Election or Combination Election for cash will be entitled to a prorated amount
of cash and a prorated number of shares of City National Stock such that
approximately the Minimum Stock Amount is converted into shares of City National
Stock.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT A HOLDER OF SHARES MAKING AN
ELECTION WILL RECEIVE THE PRECISE PROPORTION OF CITY NATIONAL STOCK AND/OR CASH
INDICATED BY SUCH HOLDER'S ELECTION.
The holder of Shares exchanged pursuant to the Merger who would have
otherwise been entitled to receive a fraction of a share of City National Stock
will receive cash (without interest) in an amount equal to such fractional part
of a share of City National Stock multiplied by the Final City National Stock
Price.
<PAGE>
The undersigned hereby surrenders the Certificates evidencing Shares listed
above (or such delivery is guaranteed in accordance with the terms hereof), or
hereby transfers ownership of such Shares on the account books maintained by a
Book-Entry Transfer Facility, and elects, upon consummation of the Merger, to
have such Shares converted into the Merger Consideration, or, if an Election is
not duly made, to have such shares treated as Undesignated Shares.
Harbor shareholders may choose to make a Cash Election, a Stock Election, a
Combination Election, and/or no election with respect to all or any portion of
the Shares held by such holder. It is understood that an Election is subject to
(1) the terms, conditions, and limitations set forth in the Proxy Statement/
Prospectus, receipt of which is hereby acknowledged by the undersigned, (2) the
terms of the Merger Agreement, attached as Appendix A to the Proxy
Statement/Prospectus, and (3) the accompanying instructions. City National's
acceptance of Shares delivered pursuant to this Letter of Transmittal will
constitute a binding agreement between the undersigned and City National upon
the terms and subject to the conditions listed above in this paragraph.
The undersigned authorizes and instructs you, as Exchange Agent, to deliver
the Shares listed above and to receive on behalf of the undersigned, in exchange
for the Shares represented thereby, any check for the cash and/or any
certificates for the shares of City National Stock issuable in the Merger.
The undersigned understands and acknowledges that all questions as to the
validity, form, and eligibility of any Election and delivery and/or surrender of
Certificates and Shares hereunder shall be reasonably determined by the Exchange
Agent, and such determination shall be final and binding. No authority herein
conferred or agreed to be conferred shall be affected by, and all such authority
shall survive, the death or incapacity of the undersigned. All obligations of
the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors, and assigns of the undersigned.
Unless otherwise indicated in the box entitled "Special Payment
Instructions," please issue any check and register any certificate for shares of
City National Stock in the name of the registered holder(s) of the Shares
appearing above under "Description of Shares." Similarly, unless otherwise
indicated in the box entitled "Special Delivery Instructions," please mail any
check and any certificate for shares of City National Stock to the registered
holder(s) of the Shares at the address(es) of the registered holder(s) appearing
above under "Description of Shares." In the event that the boxes entitled
"Special Payment Instructions" and "Special Delivery Instructions" are both
completed, please issue any check and any certificate for shares of City
National Stock in the name(s) of, and mail such check and such certificate to,
the person(s) so indicated.
<PAGE>
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SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS A3 AND C2.)
To be completed ONLY if the check is to be made payable to, or the
certificates for shares of City National Stock are to be registered in, the
name of someone other than the undersigned.
Name _______________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
ZIP CODE
__________________________________________________________________________
TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE.)
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SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS A3 AND C2.)
To be completed ONLY if the check or the certificates for shares of City
National Stock are to be mailed to someone other than the undersigned or to
the undersigned at an address other than that shown under "Description of
Shares."
Mail checks and/or certificate to:
Name _______________________________________________________________________
(PLEASE PRINT)
Address ____________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
ZIP CODE
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<PAGE>
IMPORTANT!
ALL HARBOR SHAREHOLDERS SUBMITTING
THIS LETTER OF TRANSMITTAL MUST SIGN HERE
The undersigned hereby represents and warrants that the undersigned has full
power and authority to complete and deliver this Letter of Transmittal and to
surrender the Certificate(s) surrendered herewith (or covered by a Guarantee of
Delivery in accordance with the terms hereof) or transfer Shares delivered by
book-entry transfer, free and clear of any ilens, claims, charges, or
encumbrances whatsoever. The undersigned, upon request, shall execute and
deliver all additional documents deemed by the Exchange Agent or City National
to be necessary or desirable to complete the sale, assignment, transfer,
cancellation, and retirement of the Shares delivered herewith.
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SIGN HERE
____________________________________________________________________________
____________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S))
Name(s):
____________________________________________________________________________
____________________________________________________________________________
(PLEASE PRINT)
__________________________________________________________________________
(AREA CODE AND TELEPHONE NUMBER)
Dated: ________________________
MUST BE SIGNED BY REGISTERED HOLDER(S) EXACTLY AS NAME(S) APPEAR(S) ON
STOCK CERTIFICATE(S) OR BY PERSON(S) AUTHORIZED TO BECOME REGISTERED HOLDER(S)
BY CERTIFICATES AND DOCUMENTS TRANSMITTED HEREWITH. IF SIGNATURE IS BY
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN OR OTHER ACTING IN A
FIDUCIARY CAPACITY, SET FORTH FULL TITLE AND SEE INSTRUCTION A2.
SIGNATURE GUARANTEE
(Complete Only If Required--See Instructions A2 and A3.)
Note: A notarization by a notary public is not acceptable.
FOR USE BY ELIGIBLE INSTITUTIONS ONLY
PLACE MEDALLION GUARANTEE IN SPACE BELOW
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<PAGE>
INSTRUCTIONS
A. LETTER OF TRANSMITTAL
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. This Letter of
Transmittal is to be used either if Certificates are to be forwarded herewith
(or such delivery is guaranteed in accordance with the terms hereof), or if
Shares are to be delivered by book-entry transfer pursuant to book-entry
transfer procedures. Certificates evidencing all delivered Shares (or a
guarantee of delivery as provided herein), or confirmation of a book-entry
transfer of such Shares, if such procedure is available, into the Exchange
Agent's account at one of the Book-Entry Transfer Facilities pursuant to
book-entry transfer procedures together with a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile thereof) with any
required signature guarantees (or, in the case of a book-entry transfer, an
Agent's Message (as defined below)) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address set
forth on the reverse hereof prior to the Election Deadline. If Certificates are
forwarded to the Exchange Agent in multiple deliveries, a properly completed and
duly executed Letter of Transmittal must accompany each such delivery. Harbor
shareholders whose Certificates are not immediately available and who cannot
deliver their Certificates and all other required documents to the Exchange
Agent prior to the Election Deadline or who cannot complete the procedure for
delivery by book-entry transfer on a timely basis may deliver their Shares
pursuant to the guaranteed delivery procedure contained herein. Pursuant to such
procedure: (i) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) with any required signature guarantees (or,
in the case of a book-entry transfer, an Agent's Message) and with the box
entitled "Guarantee of Delivery" properly completed and duly executed, and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent prior to the Election Deadline; and (ii) the Certificates, in
proper form for transfer, or a confirmation of a book-entry transfer of such
Shares, if such procedure is available, into the Exchange Agent's account at one
of the Book-Entry Transfer Facilities, must be received by the Exchange Agent
within three NYSE trading days after the date of execution of the Guarantee of
Delivery. In addition, at the time the Certificates (or Shares pursuant to
book-entry transfer) are delivered pursuant to the Guarantee of Delivery, the
guarantor must submit to the Exchange Agent another Letter of Transmittal with
only the section entitled "Notice of Delivery Under Guarantee" properly
completed (or must otherwise provide such information to the Exchange Agent). No
change in a shareholder's Election may be made pursuant to the Letter of
Transmittal delivering Certificates or Shares previously covered by a Guarantee
of Delivery. If the guarantor fails to deliver the Certificates (or Shares by
book-entry transfer) in accordance with the guaranteed delivery procedures
contained herein, without limitation of any other recourse, any purported
Election with respect to Shares subject to such guarantee will be void. The term
"Agent's Message" means a message, transmitted by a Book-Entry Transfer Facility
to, and received by, the Exchange Agent and forming a part of a book-entry
confirmation, which states that such Book-Entry Transfer Facility has received
an express acknowledgment from the participant in such Book-Entry Transfer
Facility delivering the Shares, that such participant has received and agrees to
be bound by this Letter of Transmittal and that City National may enforce such
agreement against the participant.
Holders of Shares who are nominees only may submit a separate Letter of
Transmittal for each beneficial owner for whom such holder is a nominee;
PROVIDED, HOWEVER, that at the request of the Exchange Agent, such holder shall
certify to the satisfaction of the Exchange Agent that such holder holds such
Shares as nominee for the beneficial owner thereof. Each beneficial owner for
whom a Letter of Transmittal is submitted will be treated as a separate holder
of Shares.
The Shares of Harbor's shareholders whose Letters of Transmittal and all
required documents are not received prior to the Election Deadline will be
treated as Undesignated Shares.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, CERTIFICATES, AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE SENDER, AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
THE RISK OF LOSS OF SUCH SHARE(S) SHALL PASS ONLY AFTER THE EXCHANGE AGENT HAS
ACTUALLY RECEIVED THE SHARE(S). IF DELIVERY IS BY MAIL, REGISTERED MAIL
<PAGE>
WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
2. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Shares
delivered herewith, the signature(s) must correspond with the name(s) as written
on the face of the Certificates evidencing such Shares without alteration,
enlargement, or any other change whatsoever.
If any Share delivered herewith is owned of record by two or more persons,
all such persons must sign this Letter of Transmittal. If any of the Shares
delivered herewith are registered in the names of different holders, it will be
necessary to complete, sign, and submit as many separate Letters of Transmittal
as there are different registrations of such Shares.
If this Letter of Transmittal is signed by the registered holder(s) of the
Shares delivered herewith, no endorsements of Certificates or separate stock
powers are required, unless checks or certificates evidencing shares of City
National Stock are to be payable to the order of, or registered in the name of,
a person other than the registered holder(s), in which case the Certificate(s)
evidencing the Shares delivered herewith must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear(s) on such Certificate(s). Signatures on such
Certificate(s) and stock powers must be guaranteed by an Eligible Institution
(as defined below).
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Shares delivered herewith, the Certificate(s)
evidencing the Shares delivered herewith must be endorsed or accompanied by
appropriate stock powers, in either case signed exactly as the name(s) of the
registered holder(s) appear(s) on such Certificate(s). Signatures on such
Certificate(s) and stock powers must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any Certificate or stock power is signed by
a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation, or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
City National of such person's authority so to act must be submitted.
3. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm which is a
bank, broker, dealer, credit union, savings association, or other entity that is
a member in good standing of the Securities Transfer Agent's Medallion Program
(each, an "Eligible Institution"). No signature guarantee is required on this
Letter of Transmittal if this Letter of Transmittal is signed by the registered
holder(s) of Shares delivered herewith, unless such holder(s) has completed
either the box entitled "Special Delivery Instructions" or the box entitled
"Special Payment Instructions" on the reverse hereof. If a Certificate is
registered in the name of a person other than the signer of this Letter of
Transmittal, or if checks or certificates are to be payable to the order of or
registered in the name of a person other than the registered holder(s), then the
Certificate must be endorsed or accompanied by appropriate stock powers, in
either case signed exactly as the name(s) of the registered holder(s) appear(s)
on the Certificate, with the signature(s) on such Certificate or stock powers
guaranteed as described above.
4. DETERMINATION OF PROPER ELECTION. The Exchange Agent will have the
reasonable discretion to determine whether Letters of Transmittal have been
properly or timely completed, signed, and submitted, modified or revoked, and to
disregard immaterial defects in Letters of Transmittal. The decision of the
Exchange Agent in such matters and any decision of City National or Harbor
required by the Exchange Agent and made in good faith shall be conclusive and
binding. The Exchange Agent will not be under any obligation to notify any
person of any defect in a Letter of Transmittal submitted to the Exchange Agent.
The Exchange Agent shall also make all computations contemplated by the Merger
Agreement and all such computations shall be conclusive and binding on the
holders of Harbor Stock. No alternative, conditional, or contingent Elections
will be accepted. If the Exchange Agent shall reasonably determine that any
purported Stock Election, Cash Election or Combination Election was not properly
made, such purported Stock Election, Cash Election or Combination Election shall
be deemed to be of no force and
<PAGE>
effect and the shareholder making such purported Stock Election, Cash Election
or Combination Election shall, for purposes hereof, be deemed to have not made
an Election.
5. INADEQUATE SPACE. If the space provided herein under "Description of
Shares" is inadequate, the Certificate numbers, the number of Shares evidenced
by such Certificates, and the number of Shares with respect to which Elections
are made should be listed on a separate schedule and attached hereto.
6. TERMINATION OF MERGER AGREEMENT. All Elections will be revoked
automatically if the Exchange Agent is notified in writing by City National or
Harbor that the Merger Agreement has been terminated, and Certificates will be
promptly returned to the persons who have submitted them. In such event, Shares
held through Book-Entry Transfer Facilities will be returned via book-transfer.
However, Shares represented by Certificates will be returned to Harbor
shareholders by registered mail (with attendant delay).
7. DISSENTER'S' RIGHTS. HOLDERS OF HARBOR STOCK WHO WISH TO EXERCISE
DISSENTERS' RIGHTS SHOULD NOT COMPLETE THIS LETTER OF TRANSMITTAL. City National
will regard any record holder of Shares who has delivered a written demand for
dissenters' rights and who subsequently delivers a Letter of Transmittal to the
Exchange Agent as having withdrawn such demand for dissenters' rights. City
National will regard any holder who has delivered a Letter of Transmittal and
who simultaneously or subsequently makes a written demand for dissenters' rights
as having revoked his or her Election. For more information, see the discussion
in the Proxy Statement/Prospectus set forth under "DISSENTER'S RIGHTS--Rights of
Dissenting Shareholders."
B. ELECTION AND PRORATION PROCEDURES
1. ELECTIONS. By completing the box entitled "Type of Election" and this
Letter of Transmittal in accordance with the instructions hereto, a Harbor
shareholder will be permitted to make a Stock Election, Cash Election or
Combination Election (each, an "Election") with respect to each of the Shares
held by such holder. In the event that holders of Harbor Stock elect, in the
aggregate, to convert more than the Maximium Stock Amount into shares of City
National Stock, certain holders of Harbor Stock will receive a prorated number
of shares of City National stock and a prorated amount of cash such that a
number of shares of Harbor Stock approximately equal to the Maximum Stock Amount
is converted into shares of City National Stock. In addition, if holders of
Harbor Stock elect, in the aggregate, to convert less than the Minimum Stock
Amount into shares of City National Stock, then certain holders of Harbor Stock
will receive a prorated number of shares of City National Stock and a prorated
amount of cash such that a number or shares of Harbor Stock at least equal to
the Minimum Stock Amount is converted into shares of City National Stock. See
the discussion in the Proxy Statement/Prospectus set forth under "THE
MERGER--Consideration Payable Upon Consummation of the Merger." As soon as
practicable after the Election Deadline, the Exchange Agent shall determine the
allocation of the cash and City National Stock portions of the Merger
Consideration and shall notify City National of its determination.
2. TREATMENT OF NON-ELECTING SHARES. Harbor Stock (other than Dissenting
Shares) with respect to which the Exchange Agent does not receive an effective,
properly completed Letter of Transmittal prior to the Election Deadline (as
defined below) will be deemed to be Undesignated Shares.
3. ELECTION DEADLINE. In order for an Election to be effective, the
Exchange Agent must receive a properly completed Letter of Transmittal,
accompanied by all required documents, NO LATER THAN 5:00 P.M., PACIFIC STANDARD
TIME, ON , 1998, unless extended to a later date by the mutual
agreement of the parties (the "Election Deadline"). SHAREHOLDERS ARE URGED TO
DELIVER A PROPERLY COMPLETED LETTER OF TRANSMITTAL, ACCOMPANIED BY ALL REQUIRED
DOCUMENTS, NO LATER THAN 5:00 P.M., PACIFIC STANDARD TIME, ON ,
1998 IN ORDER TO ENSURE THAT THEIR LETTER OF TRANSMITTAL WILL BE RECEIVED BY THE
ELECTION DEADLINE.
Any shares (other than Dissenting Shares) with respect to which the Exchange
Agent does not receive an effective, properly completed Letter of Transmittal
prior to the Election Deadline will be deemed Undesignated Shares. This Letter
of Transmittal will be deemed properly completed only if: (a) an Election is
indicated for each Share covered by this Letter of Transmittal, (b) accompanied
by one or more Certificates with respect to such shares (or (i) customary
affidavits and indemnity agreements regarding
<PAGE>
the loss or destruction of such certificates or (ii) properly executed
guarantees of delivery with respect to such Shares), (c) with respect to any
uncertificated securities, the holder of Shares completes the procedure for
delivery by book-entry transfer on a timely basis and (d) accompanied by any
other documents required by the Exchange Agent or City National.
4. CHANGES TO ELECTIONS. Any holder of Shares who has made an Election
may, at any time prior to the Election Deadline, change his or her Election by
submitting to the Exchange Agent a properly completed and signed revised Letter
of Transmittal and all required additional documents, PROVIDED that the Exchange
Agent receives such revised Letter of Transmittal and other necessary documents
prior to the Election Deadline. Any holder of Harbor Stock may at any time prior
to the Election Deadline revoke his or her Election and withdraw his
Certificates deposited with the Exchange Agent by written notice to the Exchange
Agent received prior to the Election Deadline. If an Election is revoked prior
to the Election Deadline, the related Shares will automatically become
Undesignated Shares unless and until a new Election is properly made with
respect to such Shares on or before the Election Deadline.
5. NO FRACTIONAL SHARES. No certificates representing fractional shares of
City National Common Stock shall be issued upon the surrender for exchange of
certificates representing Shares, and such fractional share interests will not
entitle the owner thereof to any dividends or any other rights of a stockholder
of City National. In lieu of any fractional share of City National Stock,
holders of Shares will receive cash (without interest) in an amount equal to
such fractional part of a share of City National Stock multiplied by the Final
City National Stock Price.
6. UNDESIGNATED SHARES. Holders of Harbor Stock who do not submit a Letter
of Transmittal prior to the Election Deadline must nevertheless submit a
properly completed Letter of Transmittal (other than the section pertaining to
the Election) and the certificate or certificates representing Harbor Stock to
the Exchange Agent in order to receive the Merger Consideration payable in
respect of such shares. No dividend or other distribution declared or made with
respect to City National Stock with a record date after the Effective Time (as
defined in the Merger Agreement) will be paid to the holder of any unsurrendered
certificate of Harbor Stock until the holder duly surrenders such certificate.
Following the surrender of any such certificate, there will be paid to the
holder, without interest (i) the amount of any cash payable with respect to a
fractional share of City National Stock to which such holder is entitled and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of City
National Stock and (ii) at the appropriate payment date, the amount of dividends
or other distributions with (A) a record date after the Effective Time but prior
to surrender and (B) a payment date subsequent to surrender payable with respect
to such shares of City National Stock.
7. NO LIABILITY. Neither City National, Harbor nor the Exchange Agent will
be liable to any holder of Shares of Harbor Stock for any shares of City
National Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
* * *
A more complete description of the election and proration procedures is set
forth in Section 2.3 of the Merger Agreement. All Elections are subject to
compliance with the election procedures provided for in the Merger Agreement. In
connection with making any Election, a Harbor shareholder should carefully read,
among other items, the description and statement of the information contained in
the Proxy Statement/Prospectus under "THE MERGER--Certain Federal Income Tax
Considerations." Each Harbor shareholder should consult his or her own tax
advisor as to the specific tax consequences of the Election and the Merger to
such shareholder.
C. RECEIPT OF MERGER CONSIDERATION, SPECIAL INSTRUCTIONS, TAXES AND ADDITIONAL
COPIES
1. RECEIPT OF MERGER CONSIDERATION. As soon as practicable after the
Effective Time and after the proration procedures described above are completed,
holders who have surrendered their Certificates to the Exchange Agent for
cancellation, together with this Letter of Transmittal (or other appropriate
letter
<PAGE>
of transmittal) duly executed and completed in accordance with the instructions
hereto and such other documents as are required pursuant to such instructions,
shall be entitled to receive in exchange therefor (A) a check in the amount
equal to the cash, if any, which such holder has the right to receive (including
any cash in lieu of any fractional shares and any dividends or other
distributions to which such holder is entitled) and (B) a certificate or
certificates representing that number of whole shares of City National Stock, if
any, which such holder has the right to receive. All cash paid or shares of City
National Stock issued upon conversion of the Shares in accordance with the terms
of the Merger Agreement shall be deemed to have been paid or issued in full
satisfaction of all rights pertaining to such Shares.
2. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If any check or certificates
evidencing shares of City National Stock are to be payable to the order of, or
registered in the name of, a person other than the person(s) signing this Letter
of Transmittal or if such checks or such certificates are to be sent to someone
other than the person(s) signing this Letter of Transmittal or to the person(s)
signing this Letter of Transmittal but at an address other than that shown in
the box entitled "Description of Shares," the appropriate boxes on this Letter
of Transmittal must be completed.
3. STOCK TRANSFER TAXES. City National will bear the liability for any
state stock transfer taxes applicable to the issuance and delivery of checks and
certificates in connection with the Merger, PROVIDED, HOWEVER, that if any such
check or certificate is to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it shall be a
condition of such exchange that the person requesting such exchange shall pay
the amount of any stock transfer taxes (whether imposed on the registered holder
or such person), payable on account of the transfer to such person, to the
Exchange Agent or satisfactory evidence of the payment of such taxes, or
exemption therefrom, shall be submitted to the Exchange Agent before any such
check or certificate is issued. EXCEPT AS PROVIDED IN THIS INSTRUCTION C3, IT
WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES
EVIDENCING THE SHARES DELIVERED HEREWITH.
4. WITHHOLDING. Following the Merger, City National or the Exchange Agent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to the Merger Agreement to any holder of Shares such amounts as
it is required to deduct and withhold with respect to the making of such payment
under the Internal Revenue Code of 1986, as amended, or any provision of state,
local, or foreign tax law. To the extent that amounts are so withheld by City
National, following the Merger, or the Exchange Agent, as the case may be, such
withheld amounts shall be treated for all purposes of the Merger Agreement as
having been paid to the holder of the Shares in respect of which such deduction
and withholding was made by City National.
5. ADDITIONAL COPIES. Additional copies of the Proxy Statement/Prospectus,
this Letter of Transmittal, and the Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 may be obtained from the Exchange
Agent.
6. SUBSTITUTE FORM W-9. Under the federal income tax law, a shareholder
who delivers Shares is required by law to provide the Exchange Agent (as payer)
with such shareholder's correct Taxpayer Identification Number ("TIN") on the
Substitute Form W-9 below. If such shareholder is an individual, the TIN is such
shareholder's social security number. If the Exchange Agent is not provided with
the correct TIN, the shareholder may be subject to a $50 penalty imposed by the
Internal Revenue Service (the "IRS"). In addition, any cash payments that are
made to such shareholder with respect to Shares converted in the Merger may be
subject to backup withholding of 31%. Certain shareholders (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and reporting requirements. In order for a foreign
individual to qualify as an exempt recipient, such individual must submit a
statement, signed under penalties of perjury, attesting to such individual's
exempt status. Forms of such statements can be obtained from the Exchange Agent.
See the enclosed Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9 for additional instructions. If backup withholding
applies with respect to a shareholder, the Exchange Agent is required to
withhold 31% of any cash payments made to such shareholder. Backup withholding
is not an additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
<PAGE>
To prevent backup withholding on any cash payments that are made to a
shareholder with respect to Shares delivered herewith, the shareholder is
required to notify the Exchange Agent of such shareholder's correct TIN by
completing the Substitute Form W-9 below certifying (a) that the TIN provided on
Substitute Form W-9 is correct (or that such shareholder is awaiting a TIN) and
(b) that (i) such shareholder has not been notified by the IRS that such
shareholder is subject to backup withholding as a result of a failure to report
all interest or dividends or (ii) the IRS has notified such shareholder that
such shareholder is no longer subject to backup withholding.
The shareholder is required to give the Exchange Agent the social security
number or employer identification number of the record holder of the Shares
tendered hereby. If the Shares are in more than one name or are not in the name
of the actual owner, consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9 for additional guidance
concerning which number to report. If the shareholder has not been issued a TIN
and has applied for a number or intends to apply for a number in the near
future, such shareholder should write "Applied For" in the space provided for
the TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For"
is written in Part I and the Exchange Agent is not provided with a TIN within 60
days, the Exchange Agent will withhold 31% of all cash payments to such
shareholder until a TIN is provided to the Exchange Agent.
Each Harbor shareholder should consult his or her own accountant or tax
advisor for further guidance in completing the Substitute Form W-9.
7. LOST, DESTROYED, OR STOLEN CERTIFICATES. If any Certificate(s)
representing Shares has been lost, destroyed, or stolen, the owner of such
Certificates should promptly notify U.S. Stock Transfer, as transfer agent for
Harbor (the "Transfer Agent"), at 818-502-1737. Such Harbor shareholder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). Upon the making of an affidavit of that fact by the person
claiming such Certificate(s) to be lost, stolen, or destroyed and the posting by
such person of a bond as indemnity against any claim that may be made with
respect to such Certificate(s), the Transfer Agent will issue in exchange for
such lost, stolen, or destroyed Certificate(s) a new Certificate representing
such Shares. This Letter of Transmittal cannot be processed until the procedures
for replacing lost or destroyed Certificates have been followed.
IMPORTANT TAX INFORMATION
In order to ensure compliance with federal income tax requirements, each
holder of Shares is requested to provide the Exchange Agent with his or her
correct TIN and to certify whether he or she is subject to backup federal income
tax withholding by completing and signing the Substitute Form W-9 below. (See
Instruction C and accompanying Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.)
<PAGE>
PAYER:
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
SUBSTITUTE
FORM W-9 PART I--PLEASE Social Security Number
Department of the Treasury PROVIDE YOUR TIN IN OR ------------------------
Internal Revenue Service THE BOX AT RIGHT AND Employer identification number
Payer's Request for Taxpayer CERTIFY BY SIGNING (If awaiting TIN, write "Applied
Identification Number (TIN) AND DATING BELOW. For")
- -----------------------------------------------------------------------------------------
PART II--For Payees Exempt From Backup Withholding, see the enclosed Guidelines and
complete as instructed therein.
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or a
Taxpayer Identification Number has not been issued to me and either (a) I have
mailed or delivered an application to receive a Taxpayer Identification Number to
the appropriate Internal Revenue Service ("IRS") or Social Security Administration
office or (b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a Taxpayer Identification Number within sixty
(60) days, 31% of all reportable payments made to me thereafter will be withheld
until I provide a number), and
(2) I am not subject to backup withholding either because I have not been notified
by the IRS that I am subject to backup withholding, as a result of failure to
report all interest or dividends, or the IRS has notified me that I am no longer
subject to backup withholding.
- -----------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified
by the IRS that you are subject to backup withholding because of underreporting interest
or dividends on your tax return. However, if after being notified by the IRS that you
were subject to backup withholding you received another notification from the IRS that
you are no longer subject to backup withholding, do not cross out item (2). (Also, see
instructions in the enclosed Guidelines.)
SIGNATURE ----------------------------- DATE------------, 199--
- -----------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
Requests for additional copies of this Form of Election may be directed to
the Exchange Agent at the address set forth below.
THE EXCHANGE AGENT IS:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
[Address]
( ) - (Call Collect)
or
Call Toll-Free (800) -
<PAGE>
HARBOR BANCORP
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 18, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder(s) hereby nominate(s), constitute(s) and
appoints James H. Gray, Kermit Q. Jones and James A. Willingham, and each of
them, the attorneys, agents and proxies of the undersigned, with full powers of
substitution to each, to attend and act as proxy or proxies of the undersigned
at the Special Meeting of Shareholders (the "Special Meeting") of Harbor Bancorp
(the "Company") to be held in the Catalina Room, Long Beach Hilton, 2 World
Trade Center, Long Beach, California on Tuesday, November 18, 1997 at 2:00 p.m.
Pacific Standard Time, and at any and all adjournments thereof, and to vote as
specified herein the number of shares which the undersigned, if personally
present, would be entitled to vote.
Please mark your votes as indicated in this example /X/
1. APPROVAL OF THE AGREEMENT AND PLAN OF MERGER. To approve the Agreement and
Plan of Merger dated as of August 28, 1997 (the "Agreement") by and between
City National Corporation ("City National") and the Company as described in
the Prospectus/Proxy Statement accompanying this proxy card, including,
without limitation, the merger of the Company with and into City National,
whereby, subject to certain allocation restrictions, each outstanding share
of the Company's common stock would be converted into the right to receive
cash, common stock of City National or a combination of the two.
/ / FOR / / AGAINST / / ABSTAIN
2. OTHER BUSINESS. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the Special Meeting and at
any and all adjournments thereof. The Board of Directors at present knows of
no other business to be presented by or on behalf of the Company or the
Board of Directors at the Special Meeting.
/ / FOR / / AGAINST / / ABSTAIN
(CONTINUED ON REVERSE SIDE)
<PAGE>
PLEASE SIGN AND DATE BELOW
The undersigned hereby ratifies and confirms all that said attorneys, agents
and proxies, or any of them, or their substitutes, shall lawfully do or cause to
be done by virtue hereof, and hereby revokes and all proxies heretofore given by
the undersigned to vote at the Special Meeting. The undersigned acknowledges
receipt of the Notice of the Special Meeting and the Prospectus/Proxy Statement
accompanying said Notice.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF MERGER. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN
THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS
MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE THE AGREEMENT AND
PLAN OF MERGER.
I (WE) WILL / / WILL NOT / / ATTEND THE SPECIAL MEETING IN PERSON.
Dated: _______________, 19__
Signed: ____________________
Signed: ____________________
Please date this proxy
signing above as your
name(s) appear(s) on this
card. Joint owners should
each sign personally.
Corporate proxies should be
signed by an authorized
officer. Executors,
administrators, trustees,
etc., should give their full
titles.
